Question

Pacheco, Inc., produces two products, overs and unders, in a single process. The joint costs of this process were $50,000, and 14,000 units of overs and 36,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $18,000; unders, $23,040. Overs sell for $2.00 per unit; unders sell for $3.14 per unit.
Required:

1. Allocate the $50,000 joint costs using the estimated net realizable value method.

2. Suppose that overs could be sold at the split-off point for $1.80 per unit. Should Pacheco sell overs at split-off or process them further?

Answer 1

Answer:

1.

Joint costs allocation using the estimated net realizable value method:

Overs: $5,000; Unders: $45,000

2.

Overs should not further process and the company should sell Overs at split-off. It is because the further process cost per unit is more than the incremental in selling price thanks to further process per unit.

Explanation:

1.

We have:

Net realizable value of Overs = Sales value of Overs - Processing cost after split-off of Overs = 2 x 14,000 - 18,000 = $10,000

Net realizable value of Unders = Sales value of Unders - Processing cost after split-off of Unders = 3.14 x 36,000 - 23,040 = $90,000

=> Total net realizable value of the two goods = $100,000; in which Overs accounts for 10%; Unders accounts for 90%.

=> Joint cost allocated to Overs = 10% x 50,000 = $5,000; Joint cost allocated to Unders = 90% x 50,000 = $45,000.

2.

By further processing, one unit of Overs is created the incremental of revenue of: Sell price after further process - Sell price before further processing = $2 - $1.8 = $0.2

Further processing cost per unit of Overs = 18,000 / 14,000 = $1.29.

As revenue incremental per unit is less than further processing cost per unit (0.2 < 1.29); the company should sell Overs at split-off.