Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $355,000 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 A B C Selling Price $ 21.00 per pound $ 15.00 per pound $ 27.00 per gallon Quarterly Output 13,200 pounds 20,600 pounds 4,400 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 $ 73,440 $105,620 $ 46,000 Selling Price $26.20 per pound $21.20 per pound $35.20 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 - 345840 4367201 154880 277200 309000 118800 68640 127720 36080 734401 105620 46000 -4800 22100 -9920 - Incremental Profit if processed further $ 7,380 Particulars Product - A Product -B Sell at Split off YES Sell after Processing further NO YES NO Product - C YES NO