Question

Biotech Pharma Inc., manufactures three therapeutic compounds from a common input in a joint processing operation. Joint processing costs up to the split-off point total $100,000 per year. The company allocate these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: compound X, $50,000; compound Y, $90,000; and compound Z, $60,000.

Each compound may be sold at the split-off point as raw material to other pharmaceutical companies or processed further. Additional processing requires no special facilities. The additional processing costs and the sales value after further processing for each compound (on an annual basis) are shown below:

Compound	Additional Processing Costs	Sales Value after Further Processing
X	$35,000	$80,000
Y	$40,000	$150,000
Z	$12,000	$75,000

Required:

Which compound(s) should be sold at the split-off point, and which compound(s) should be processed further? Show computations.

Answer 1

Prepare incremental analysis :

	X	Y	Z
Sale value after further processing	80000	150000	75000
Sale value at split off point	50000	90000	60000
Incremental revenue	30000	60000	15000
Additional processing cost	35000	40000	12000
Incremental profit	(5000)	20000	3000

Compound Y and compound Z should be sold after further processing and Compound X should be sold at split off point.