Question

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $62,000 per ton, one-fourth of which is allocated to product X15. Eight thousand three hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $16 each, or processed further at a total cost of $9,800 and then sold for $19 each. Required: 1. What is the financial advantage (disadvantage) of further processing product X15? 2. Should product X15 be processed further or sold at the split-off point? 2. Product X15 should be

Answer 1

Ans. 1 : Material and processing cost per ton = 62,000 dollars

* Cost allocated to product X15 = 62,000*1/4 = 15,500 dollar

* 8,300 units of product X15 can be sold at split off point for 16 dollar each, which give revenue equals to = 8,300*16 = 1,32,800 dollars.

Net revenue at split off point = 132800-15500= 117300 dollars.

* Further process cost = 9800 dollars

Sale value is 19 dollar per unit. Therefore net revenue at further processing = 8300*19 - 15,500 - 9,800 = 1,32,400 dollars

* Financial advantage of further process product X15 = 132400 - 117300 = 15,100 dollars

Ans. 2: Product X15 should be processed further as it gives incremental profit of 15,100 dollar when sold after further processing in comparison to selling at split off point.