Question

Exercise 12-7 Sell or Process Further Decisions [LO12-7]

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $340,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	18.00	per pound		12,600	pounds
B	$	12.00	per pound		19,700	pounds
C	$	24.00	per gallon		3,800	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	66,090	$	22.90	per pound
B	$	94,655	$	17.90	per pound
C	$	39,460	$	31.90	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

Calculating increase in profit If processed further Particulars Sales after processed Sales at split off Incremental revenue Additional cost Incremental incom/(loss) Product - A Product - B Product - C 288540 352630 1212201 226800 2364001 91200 61740 116230 30020 66090 94655 39460 -4350 21575 -9440 Incremental Profit if processed further $ 7,785 Particulars Split off Process further Product - A Product -B YES DYES Product - C YES