Question

What is a joint production process? Describe a special decision that commonly arises in the context of a joint production process. Briefly describe the proper approach for making this type of decision. Draw an example with detailed cost numbers.

Please answer in your words

Answer 1

A joint production process is a process which yields multiple products from manufacture or production operations with a common raw material. For example: A common raw material can produce product X, Y and Z as output

The special decision that commonly arises in a joint production process is whether to sell the product at split off point or process it further and sell

The proper approach is

· Determine the incremental sales revenue. Incremental sales revenue is difference between Final sales value and sales value at split off point

· Determine the additional processing cost of the product beyond split off point

· Calculate the incremental gain or loss ( Incremental sales revenue minus additional processing cost)

· If there are gains process further and sell or if there are losses sell at split off point.

· Joints costs incurred is not relevant for decision making

Example is give below with hypothetical numbers.

$12 $16 Selling price after further processing Selling price at the split-off point incremental revenue per unit Less: Additional processing costs Incremental profit (Loss) per unit Process further Product x Product Product Z $19 $19 $24 $17 $7 $3 $7 $2 $41 $4 $5 -$1 $3 Yes No Yes