Question

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $62,000 per ton, one-fourth of which is allocated to product X15. Eight thousand three hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $16 each, or processed further at a total cost of $9,800 and then sold for $19 each.
Required:
1. What is the financial advantage (disadvantage) of further processing product X15?
2. Should product X15 be processed further or sold at the split-off point?

Answer 1

Answer:

1) Financial advantage = $15,100

2) X15 should be processed further because it would generate 15,100

Explanation:

A company should process a product further 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 are irrelevant to the decision to process further .  

                                                                                       $

Sales revenue after further processing

(19×8,300)                                                                   157,700                  

Sales revenue at the split-off point

(16×8,300)                                                                   132,800

Additional sales revenue from further processing   24,900

Less further processing cost                                      (9,800)

Financial advantage                                                     15,100

Financial advantage = $15,100

X15 should be processed further because it would generate 15,100