Product Number of Units Produced Selling Price at Split-Off Selling Price After Processing Additional Processing Costs ...

Product	Number of Units Produced	Selling Price at Split-Off	Selling Price After Processing	Additional Processing Costs
tables	4500	$11.00	$15.50	$11,000
benches	6000	$14.00	$16.20	$16,500
planters	1500	$18.50	$26.00	$8,000

Superior Company manufactures three products using the same production process: tables, benches, and planters. The costs incurred up to the split-off point are $250,000. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of units produced, the selling prices per units at each point in production, and the additional processing costs are as follows:

1) Which information is not relevant to the decision on whether or not to process the products further (1 pt)?

2) Prepare an incremental analysis (with labels!) of the three products (6 pts).

3) Which products should be processed further and which should be sold at the split-off point (2 pts)?

4) Would your decision in #3 be different if the company was using quantity of output to allocate joint costs? Explain (1 pt).

Solutions

Expert Solution

The costs that are relevant in this decision are the incremental revenues and the incremental costs associated with processing the material past the split-off point. Any costs incurred up to the split-off point are sunk costs and therefore irrelevant to this decision

Revenue after further processing:

Tables = 4500 * 15.5 = 69,750

Benches = 6000 * 16.2= 97,200

Planters = 1,500 * 26 = 39,000

Revenue at split-off:

Tables = 4500 * 11 = 49,500

Benches = 6000 * 14 = 84,000

Planters = 1500 * 18.5 = 27,750

	Tables	Benches	Planters
Incremental revenue	69,750-49,500 = 20,250	97,200-84,000 = 13,200	39000-27,750 = 11,250
Incremental costs	11,000	16,500	8,000
Incremental profit/(loss)	9,250	(3,300)	3,250

The product tables and planters shall be processed further. Benchers shall be sold at split off.

Since, the joint cost do not have impact on decision of whether to process further or not, the answer would remain same.

ekkarill92 answered 4 months ago

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