Question

Part 5: Joint Product Costs (10 points) 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: Required: What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point

Answer 1

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

A company 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 costs incurred up to the split-off point are irrelevant to the decision to process further .  

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                (32,000)

Additional sales revenue                                  12,800  

Further processing cost                                    (11,600)

Increase in Net income                                       11,200

Net monetary advantage = $11,200

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