Question

Two products, LB and NH, emerge from a joint process. Product LB has been allocated $14,300 of the total joint costs of $35,000. A total of 2,100 units of product LB are produced from the joint process. Product LB can be sold at the split-off point for $11 per unit, or it can be processed further for an additional total cost of $10,100 and then sold for $13 per unit. If product LB is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?

a. $17,200 more profit

b. $20,600 less profit

c. $8,400 more profit

d. $5,900 less profit

Answer 1

Answer: option (d) is correct

Explanation:

REVENUE IN CASE OF SALE OF PRODUCT LB AT THE POINT OF SPLIT OFF -

Revenue = (Selling price per unit of product LB at split off point * Number of units of LB) - Product LB share in the Joint cost

               = ($11 * 2,100 units) - $14,300

               = $8,800

REVENUE IN CASE OF SALE OF PRODUCT LB AFTER FURTHER PROCESSING -

Revenue = (Selling price per unit of product LB after further processing * Number of units of LB) - Product LB share in the Joint cost - Further processing cost for product LB

                  = ($13 * 2,100 units) - $14,300 - $10,100

                  = $2,900

Therefore,

Decrease in profit in case of further processing of Product LB = REVENUE IN CASE OF SALE OF PRODUCT LB AT THE POINT OF SPLIT OFF - REVENUE IN CASE OF SALE OF PRODUCT LB AFTER FURTHER PROCESSING

                                                                                              = $8,800 - $2,900

                                  = $5,900

Hence, there will be a decrease in the profit $5,900 if product LB is sold after further processing.