Question

Exercise 13-6 Sell or Process Further (LO6)

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. 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 $16 per pound 15,000
B $8 per pound 20,000
C $25 per gallon 4,000

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 $63,000 $20 per pound
B $80,000 $13 per pound
C $36,000 $32 per gallon
Compute the incremental profit (loss) for each product.

Which product or products should be sold at the split-off point and which product or products should be processed further? Show Computations.

Answer 1

Concepts and reason

Decision making:

Decision making is the process of identifying the certain factors by gathering information. Decision making process helps the management to ascertain the most profitable option.

Following are the steps in decision making:

• Identification of the purpose of the decision

• Information gathering

• Principles for judging the alternatives

• Brainstorm and analyze the different choices

• Evaluation of alternatives

• Select the best alternative

• Execute the decision

• Evaluate the results

Fundamentals

Sell or process further:

Sell at split off stage or process further is also a part of decision making process. In this the management has to decide whether the product should be sold at the split off stage or processed further.

There are different ways to analyze the case.

• Incremental or Differential approach: In this approach, differential income and expenses are computed. if income exceeds the expenses, product is further processed. If expenses exceed the income, product is sold at split off stage.

• Opportunity cost approach: In this approach, net income from further processed product is compared with the opportunity cost of not selling the product at split off stage. If the result is positive then business should choose further processing

• Total project approach: In this approach, the profits of both the options are compared. Option with the higher profit should be chosen.

Table showing incremental Profit or Loss for product A:

Table showing incremental Profit or Loss for product B:

Table showing incremental Profit or Loss for product C:

Ans:

Total incremental loss is $3,000.