Question

In: Accounting

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

a.

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

b.

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

c.

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

d.

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

ekkarill92 answered 10 months ago
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