Question

Posh Pillows manufactures two​ products, pillows and​ cushions, from a joint process. Pillows are allocated

$ 7 comma 100$7,100

of the total joint costs of

$ 25 comma 000$25,000.

There are

2 comma 5002,500

pillows produced and

2 comma 5002,500

cushions produced each year. Pillows can be sold at the

splitminus−off

point for

$ 10$10

per​ unit, or they can be processed further into a deluxe pillow for additional processing costs of

$ 8 comma 000$8,000

and sold for

$ 21$21

for each deluxe pillow. If the pillows are processed further and made into deluxe​ pillows, the effect on operating income would be

A.

$ 19 comma 500$19,500

net increase in operating income.

B.

$ 25 comma 000$25,000

net decrease in operating income.

C.

$ 25 comma 000$25,000

net increase in operating income.

D.

$ 19 comma 500$19,500

net decrease in operating income.

Answer 1

POSH PILLOWS

Data Given

Joint Cost for making Pillows and Cushions per year = $25000

Allocation of joint cost for pillows = $7100

No. of pillows produced per year = 2500

No. of cushions produced per year = 2500

Sales price of normal pillows = $10 per pillow

Sales price of deluxe pillow = $21 per pillow

Additional cost of converting normal 2500 pillows into 2500 deluxe pillows = $8000

Operating income from normal pillows.

Sales Revenue from normal pillows = (2500 x 10) $25000

Less : Cost of producing 2500 normal pillows (as given) $7100

Operating Income from selling 2500 normal pillows $17900

Operating income from deluxe pillows.

Sales revenue from selling 2500 deluxe pillows = (2500 x 21) = $52500

Less : Cost of 2500 normal pillows = $7100

Less : Cost of converting in to deluxe pillows (2500 pillows) = $8000 (as given)

Operating Income from deluxe pillows = $37400

Increase due to processing of normal pillows into deluxe pillows in operating income = operating income from deluxe pillows - operating income from normal pillows

= $37400 - $17900

= $19500

So, there is a increase of $19500 due to processing of normal pillows into deluxe pillows. So option A. is correct.