Question

III. Sell or Process further. Danelle, Inc., produces four products (Alpha, Beta, Gamma and Delta) from a common input. The joint costs for a typical quarter follow: Direct materials Direct labor Overhead $128.000 56,000 80,000 The revenues from each product are as follows: Alpha, $130,000; Beta, 893,000; Gamma, $30,000; and Delta, $40,000. Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $73,700. However, to process Delta further means that the company must rent some special equipment costing $15,400 per quarter. Additional materials and labor also needed would cost $8,500 per quarter. Required: 1. What is the operating profit earned by the four products for one quarter? 2. Should the division process Product Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?

1.) what is the operating profit earned by the four products for one quarter?

2.) Should the division process Product Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?

Answer 1

1) Calculation of Operating Profit for one Quarter (Amounts in $)

	Alpha	Beta	Gamma	Delta	Total
Revenues (A)	130,000	93,000	30,000	40,000	293,000
Joint Costs:
Direct Materials					128,000
Direct Labor					56,000
Overhead					80,000
Total Joint Costs (B)					264,000
Operating Profit (A-B)					29,000

Therefore the operating profit earned by the four products for one quarter is $29,000.

2) Calculation of increase or decrease in operating profit if Delta is processed further (Amounts in $)

Increase in Delta Revenue (73,700-40,000)	33,700
Addition Rent expense	(15,400)
Additional cost of material and labor	(8,500)
Net Increase in operating profit	9,800

Quarterly Operating profit of the company will increase by $9,800 if the division process Product Delta further. Hence the company should process Delta further.