Question

WP Corporation produces products X, Y, and Z from a single raw material input in a joint production process. Budgeted data for the next month is as follows: Product X Product Y Product Z Units produced 2,500 3,000 4,000 Per unit sales value at split-off $ 23.00 $ 24.00 $ 25.00 Added processing costs per unit $ 2.00 $ 4.00 $ 4.00 Per unit sales value if processed further $ 27.00 $ 27.00 $ 32.00 The cost of the joint raw material input is $92,000. Which of the products should be processed beyond the split-off point?

Answer 1

Answer:

Product X and Z should be processed further because the additional sales revenue is greater that further processing cost which leads to a profit.

Product Y should not be processed further because doing so would lead to a loss

Explanation:

WP Corporation should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point (i.e $92,000) are irrelevant to the decision to process further .  

                                                                  X          Y             Z

Sales value at split of point                     23        24           25

Sales value after split off point                27      27             32

Additional sales value                               4         3              7

Further processing cost                           ( 2)      ( 4 )          ( 4)

Net income?(loss)                                     2          (1 )             3

Product X and Z should be processed further because the additional sales revenue is greater that further processing cost, which leads to a profit.

Product Y should not be processed further because doing so would lead to a loss