Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Product Selling Price Quarterly Output A $ 16 per pound 15,000 pounds B $ 8 per pound 20,000 pounds C $ 25 per gallon 4,000 gallons Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product Additional Processing Costs Selling Price A $ 63,000 $ 20 per pound B $ 80,000 $ 13 per pound C $ 36,000 $ 32 per gallon Required: 1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point? 2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

Products	A	B	C
Quantity	15,000	20,000	4,000
Unit selling price at a split-off point	$                                 16.00	$                                    8.00	$                                 25.00
Unit selling price after further processing	$                                 20.00	$                                 13.00	$                                 32.00
Additional selling revenue per unit if further processed	$                                    4.00	$                                    5.00	$                                    7.00
Additional selling revenue if further processed	$                          60,000.00	$                       100,000.00	$                          28,000.00
Further processing cost	$                          63,000.00	$                          80,000.00	$                          36,000.00
Gain/(loss) on further processing	(3,000.00)	20,000.00	(8,000.00)
As we can see there is loss in further processing of A and C hence no further processing for the same and should be sold at split-off point. However, B will give additional
benefit if further processed and hence B should be further processed.
	A	B	C	Total
Selling revenue at split off point	$                       240,000.00	$                       160,000.00	$                       100,000.00	$          500,000.00
Joint Processing cost split	350000*240000/500000	350000*160000/500000	350000*100000/500000
Joint Processing cost split	$                       168,000.00	$                       112,000.00	$                          70,000.00	$          350,000.00
Profit statement	A	B	C
Units	15,000.00	20,000.00	4,000.00
Selling point	split off	further processed	split off
Selling price per unit	$                                 16.00	$                                 13.00	$                                 25.00
Selling revenue	$                       240,000.00	$                       260,000.00	$                       100,000.00
Joint cost	$                      (168,000.00)	$                      (112,000.00)	$                        (70,000.00)
Additional cost		$                        (80,000.00)
Gain	$                          72,000.00	$                          68,000.00	$                          30,000.00