Question

PTER 7 Incremental Analysis E7-23 Bahrat, Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. The cost and selling price data for a recent period are as follows: er to Sales Value at Cost to Split-Off Point $50,000 Process Further $100,000 30,000 Sales Value after Further Processing $190,000 Product 12 Product 14 10,000 35,000 Product 16 60,000 150,000 220,000 Instructions (a) Determine the total net income if all products are sold at the split-off point. (b) Determine the total net income if all products are sold after further processing. (c) Using incremental analysis, determine which products should be sold at the split-off point and which should be pro- cessed further. (d) Determine the total net income using the results from part (c) and explain why the net income is different from that determined in part (b).

Answer 1

Part-1)

Sales ($50,000 + $10,000 + $60,000)	120,000
Joint costs	100,000
Net income	20,000

　

Part-2)

Sales ($190,000 + $35,000 + $220,000)	445,000
Joint costs	-100,000
Additional costs ($100,000 + $30,000 + $150,000)	-280,000
Net income	65,000

　

Part-3)

	Product 12	Product 14	Product 16
Incremental revenue (190,000 - 50,000); (35,000 - 10,000) ; (220,000 - 60,000)	140,000	25,000	160,000
Incremental costs (given)	-100,000	-30,000	-150,000
Incremental profit (loss)	40,000	-5,000	10,000

　

The above calculations reveal that Product 12 and 16 should be processed further; while the product 14 need to be sold at the split-off point.

Part-4)

Sales ($190,000 + $10,000 + $220,000)	420,000
Joint costs	-100,000
Additional costs ($100,000 + $150,000)	-250,000
Net income	70,000

Because the product 14 need to be sold at the split-off point and cannot be sold further thus the net income is higher in(d) compared to (b)