Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $380,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	26.00	per pound		14,200	pounds
B	$	20.00	per pound		22,100	pounds
C	$	32.00	per gallon		5,400	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	86,490	$	31.70	per pound
B	$	125,095	$	26.70	per pound
C	$	57,700	$	40.70	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

Differential analysis
			A	B	C
Selling price after further processing			31.7	26.7	40.7
Less: Sselling price at splitt off			26	20	32
Incremental price			5.70	6.70	8.70
Multiply: Units			14200.00	22100.00	5400.00
Incremental revennue			80940.00	148070.00	46980.00
Less: Incremental cost			86490.00	125095.00	57700.00
Incremental income			-5550.00	22975.00	-10720.00
Decision			Splitt off	Further	Splitt off
				processing