Question

The Wyeth Corporation produces three products, A, B, and C, from a single raw material input. Product A can be sold at the splitoff point for $40,000, or it can be processed further at a total cost of $15,000 and then sold for $58,000. Joint costs total $60,000 annually. Product A should be:

Answer 1

Answer:

It is preferable to further process Product A.

Explanation:

Product should be processed further before sale if the net incremental benefits from further processing is positive.

The net incremental benefits from further processing is increase in revenue when further processed less further costs of processing.

Increase in revenue=$58,000-$40,000

                                 =$18,000

Further processing costs=$15,000

Net incremental benefits=$18,000-$15,000

Net incremental benefits=$3,000

Since processing further brings a net benefit of $3,000, Product A should be further processed before being sold.

Answer 2

Answer:

Product A should be processed further and then sold at $58,000.

Explanation:

In to determine this, the decision rule is to compare the revenue from selling A at the splitoff point with the net revenue from processing A further and chose the one that is greater as follows:

Revenue from selling A at the splitoff point = $40,000

Net revenue from processing A further = $58,000 - $15,000 = $43,000

Amount of increase in A revenue by processing it further = $43,000 - $40,000 = $3,000

Since the net revenue of $43,000 from processing A further is greater than the revenue of $40,000 from selling A at the splitoff point by $3,000, Product A should be processed further and then sold at $58,000.