Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $345,000 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 Selling Price Quarterly OutputA $ 19.00 per pound 12,800 poundsB $ 13.00 per pound 20,000 poundsC $ 25.00 per gallon 4,000 gallonsEach 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 Selling Processing Costs PriceA $ 68,500 $ 24.00 per poundB $ 98,250 $ 19.00 per poundC $ 41,600 $ 33.00 per gallonRequired: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?

Answer 1

Answer and Explanation:

1. The computation of financial advantage (disadvantage) of further processing is shown below:-

Particulars            Product A        Product B        Product C

Selling price after further

processing a            24.00             19.00               33.00

Selling price at the

split-off point b         19.00              13.00                25.00

Incremental revenue per

pound or gallon      5.00                6.00               8.00

(c = a - b)

Total quarterly output in

pounds or gallons d  12,800        20,000              4,000

Total incremental

revenue                 $64,000        $120,000           $32,000

(e = c × d)

Total incremental

processing costs f $68,500       $98,250           $41,600

Financial advantage (disadvantage)

of further

processing            ($4,500)      $21,750              ($9,600)

(g = e - f)

2. Product A and Product C will be sold at the split-off point

Therefore,  Product B will be processed further