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 $93,000 per quarter. 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 S3 per pound $ 4 per pound S8 per gallon Quarterly Output 17,000 pounds 22.000 pounds 8.000 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 $ 43,000 $ 39,000 $ 12.750 Selling Price $ 5 per pound S 7 per pound $ 10 per gallon Required: a. Compute the incremental profit (loss) for each product. Product A Product B Product C Selling price after further processing Selling price at the split-off point Incremental revenue per pound or gallon Total quarterly output in pounds or gallons Total incremental revenue Total incremental processing costs Total incremental profit or loss

Answer 1

Solution:

	Product A	Product B	Product C
Selling Price after further processing (a)	$ 5	$ 7	$ 10
Selling Price at split off point (b)	3	$ 4	$ 8
Incremental revenue per pound or gallon (c) = (a) - (b)	2	$ 3	$ 2
Total quarterly output in pounds or gallons (d)	17,000	22,000	8,000
Total incremental revenue (e) = (d) x (c)	34,000	66,000	16,000
Total incremental processing costs (f)	43,000	39,000	12,750
Total incremental profit or ( loss ) (e) - (f)	$ (9,000)	27,000	3,250

The incremental profit shows the additional profit earned by further processing the product instead of selling the product at split off point. This profit arises because the additional costs incurred to further process it is less than the increase in revenue earned by selling it after further processing.

Since there is an incremental loss in product A we should not further process it while product B and C show incremental profits so we should further process these products.