Question

Ibsen Company makes two products from a common input. Joint processing costs up to the split-off point total $47,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

	Product X			Product Y			Total
Allocated joint processing costs	$	18,400		$	28,600		$	47,000
Sales value at split-off point	$	25,650		$	37,400		$	63,050
Costs of further processing	$	22,900		$	17,200		$	40,100
Sales value after further processing	$	48,000		$	55,700		$	103,700

Required:

a. What is financial advantage (disadvantage) of processing Product X beyond the split-off point? (Negative amount should be indicated by a minus sign.)

b. What is financial advantage (disadvantage) of processing Product Y beyond the split-off point?

c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Note: List a and b as either financial advantage or financial disadvantage and the values for all (a,b,c,d)

	a. b. c. Minimum acceptable amount d. Minimum acceptable amount

Answer 1

a. What is financial advantage (disadvantage) of processing Product X beyond the split-off point?

Sale value after further processing	48000
(-) Sales value at split of point	25650
Incremental revenue	22350
(-) Further processing cost	22900
Disadvantage in further processing	-550

What is financial advantage (disadvantage) of processing Product Y beyond the split-off point?

Sale value after further processing	55700
(-) Sales value at split of point	37400
Incremental revenue	18300
(-) Further processing cost	17200
Advantage in further processing	1100

What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

= Sale value at split of point - Disadvantage with further processing

= 25650 - 550 = 25100

What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

= Sale value at split of point + Advantage with further processing

37400 + 1100 = 38500

Explanation

In the case of product - Y, we have an advantage with further processing. When this advantage is offered to us at the split off point itself ( i.e 37400 + 1100), then we dont need to go for further processing. Thus 38500 becomes the minimum price for accepting the sale at spilt off point.

In the case of Product - X, we already had best price at split. If it decreases up to 550, then selling at split is not advantagious for us. Thus we determine the minimum price as 25650 - 550