Question

Phillippe Inc. manufactures A and 8 from a joint process (cost $80,000). Five thousand pounds of A can be sold at split-off for $20 per pound or processed further at an additional cost of $20,000 and then sold for $25 per pound. If Phillippe decides to process A beyond the split-off point, operating income will ___________.
A. increase by $10,000.
B. increase by $20,000.
C. decrease by $10,000.
D. decrease by $20,000.
E. increase by $5,000.

Answer 1

Answer:

E. increase by $5,000.

Explanation:

For computing the operating income, first, we have to compute the incremental revenue and then deduct the incremental cost, so that the operating income could find out

The incremental revenue would be

= Number of pounds sold × (Selling price per pound - Split-off sale price per pound)

= 5,000 pounds × ($25 - $20)

= 5,000 pounds × $5

= $25,000

And, the additional cost for processed further is $20,000

Now put these price to the above formula  

So, the operating income would equal to

= $25,000 - $20,000

= $5,000 increase