Question
Iaci Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: Product X Product Y Total Allocated joint processing costs $22,400 $19,600 $42,000 Sales value at split-off point $32,000 $28,000 $60,000 Costs of further processing $11,600 $25,300 $36,900 Sales value after further processing $44,800 $53,200 $98,000 Required: (a) What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
Answer:
Net monetary advantage = $11,200
Explanation:
Sales
<em>A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost. </em>
<em>Also note that all costs incurred up to the split-off point are irrelevant to the decision to process further </em>.
We can apply this principle to the question as follows:
$
Sales revenue after the split-off point 44,800
Sales revenue at the split-off point <u> (32,000)
</u>
Additional sales revenue 12,800
Further processing cost <u> (11,600)
</u>
Increase in Net income <u> 11,200</u>
Net monetary advantage = $11,200
<em>Kindly note that the allocated joint cost of 22, 400 to product X is a sunk cost. This implies whether or not the Product X is processed further the sunk cost is irrelevant to the decision</em>
