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 $370,000 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 Output A $ 24.00 per pound 13,800 pounds B $ 18.00 per pound 21,500 pounds C $ 30.00 per gallon 5,000 gallons 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 $ 81,150 $ 29.50 per pound B $ 117,125 $ 24.50 per pound C $ 52,900 $ 38.50 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?

Answer 1

Answer:

A (5,250) sold at split-off

B 22,625 continue

C (10,400) sold at split-off

Explanation:

Result for further processing:

quantity ( further process price - raw price) less further processing cost

Product A

13,800 pounds x (29.5 - 24) - 81,150 = (5,250)

Product B

21,500 pounds (24.50 - 18) - 117,125 = 22,625

Product C

5,000 gallon ( 38.5 - 30) - 52,900 = (10,400)

We must understand that the join processing cost are already incurred (sunk) therefore, not relevant. We hould check if the further process increases or not the gross profit.

As B is the only which increase the gross profit we continue the processing. THe other product based on our cost structure are not viable

Answer 2

Answer:

A. ($5250) if sold at split-off

B. $22625 if processed further

C. ($10400) if sold at split off

Explanation:

Calculations: Quantity (Further process price – Raw price) – Further processing cost

Product A: 13800 (29.5 – 24) – (81150) = (5250)

Product B: 21500 (24.5 – 18) – 117125= 22625

Product C: 5000 (38.5 – 30) – 52900 = (10400)

1. Since, the split-off costs are already incurred so they can’t be reversed that is why they are called sunk costs but can see if the further process costs are adjustable so that we can cut them or pursue them if they are profitable.

2. The product B is the only product which is profitable and could be further processed, otherwise the products A and C are non-profitable.