Question

Striker Chemical Lab manufactures liquids into three different outputs: Freisa, Bracko, and Pragin. Freisa accounts for 56 percent of the net realizable value at the split-off point, Bracko accounts for 29 percent, and Pragin accounts for the balance. The joint costs total $644,000. If Pragin is accounted for as a by-product, its $74,000 net realizable value at split-off is credited to the joint manufacturing costs by crediting the by-product’s net realizable value as a reduction in the joint costs.

1. How should management decide whether a product should be sold at splitoff or processed further?
2. Explain for Striker if the sales value at split off method of joint-cost allocation is the best method for generating the information needed to make a decision. What does this mean for the by-product output Pragin?

Answer 1

Based on the information mentioned in the case, company manufacture three different output classified as

• Freisa
• Bracko
• Pragin

Their net realizable value is 56%, 29% and 15% respectively at the split-off point

Joint Total cost is incurred amounts to 644,000

Net Realizable value for Pragin = 74,000 i.e. 15% of the total output

Hence total net realizable would be 493,333

Net Realizable value of Freisa is 276,266.48 (493,333* (56/100))

Similarly net realizable value for Bracko would be 143,066.57 (493,333*(29/100))

Total joint cost is given to 644,000 we can divide the total costs incurred in the ratio of output's net realizable value.

Management should do the cost-benefit analysis for each output based on their overall costs and net realizable value.If the net realizable value is more than actual costs than that product should be sold at split-off level and no further processes are required.

Also Management has to weigh the benefits derived after further processing the product according to current market forces of demand and supply in the economy and check each product financial feasibility in order to achieve company goals and objectives.

Sales value solely should not be considered while making the decision, other crucial factors should also be considered while taking the decision for selling at split-off point or process further. Management has to generate more information such as market demand and supply of the product.

• Price of substitute products in the market
• Availability of the raw materials
• Overall production costs
• Taste and preferences of the customer
• Competition price and sales strategies
• Availability of Market
• Cost-benefit of each product

For Pragin the net realizable value is 74,000 that account for 15% share of net realizable value. Management should check the overall market scenario for pragin including level of competition in the similar product category and market size of the product and their individual market share in order to proceed with the decision.