Question

Exercise 12-7 Sell or Process Further Decisions (LO12-7] Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $340,000 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 A Selling Price $ 18.00 per pound $ 12.00 per pound $ 24.00 per gallon Quarterly Output 12,600 pounds 19,700 pounds 3,800 gallons C 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: Additional Product Processing Costs $66,090 $94,655 $39,460 Selling Price $22.90 per pound $17.90 per pound $31.90 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? What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? (Enter "disadvantages as a negative value.) Product Product B Product C Financial advantage (disadvantage) of further processing 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? Product A Product B Product C Sell at split-off point? Process further?

Answer 1

Req 1.
The financial advantage of further processing can be computed by comparing incremental revenue dervied from further processing and additional cost of further processing.
The Incremental revenue shall be the difference between the revenue generated after further processing and revenue generated at splitt off point.
The financial advantage or disadvantage of further processing is as under:
Incremental Analysis
				A	B	C
Units produced-A				12600	19700	3800
Selling price after further processing -B				22.9	17.9	31.9
Selling price at splitt of point-C				18	12	24
Sales revenue after further processing (A*B)				288540	352630	121220
Less: Sales revenue at splitt of point (A*C)				226800	236400	91200
Incremental revenue after further processing				61740	116230	30020
Less: Additional Processing cost				66090	94655	39460
Financial advantage (Disadvantage)				-4350	21575	-9440
Thus, it can be said that only Product B has a financial advantage of $ 21,575 of further processing
Answer:
			Product A	Product B	Product C
Financial advantage (Disadvantage)			-4350	21575	-9440
Req 2.
As only Product B has financial advantage, therefore, only it should be processed further.
Both A and C product shall be sold at splitt off point.
Decision recommended is:
			Product A	Product B	Product C
Sell at splitt off point			Yes		Yes
Process further				Yes