Question

Brevall Industries makes corn oil and corn meal from harvested corn in a joint process. Corn oil can be further processed into margarine, and the corn meal can be further processed into corn muffin mix. The joint cost incurred to process the corn to the split-off point is $140,000. Information on the quantities, value, and further processing costs for the joint product appears below:

		Quantity		Sales Value At Split-off		Estimated Further Processing Cost		Sales Value After Processing
Corn Oil		800,000 lbs.		$0.30/lb.		$0.15/lb.		$0.60/lb.
Corn Meal		1,600,000 lbs.		0.10/lb.		0.46/lb.		0.55/lb.

Brevall allocates the joint cost to the products based on physical units. Corn oil is assigned $46,667 of joint cost and corn meal is assigned $93,333 of joint cost. Which products should be processed further?

Corn oil

Corn meal

Both corn oil and corn meal

Neither corn oil nor corn meal

Answer 1

Answer)

The decision of further processing of joint products is based in incremental analysis. If the incremental revenue is more than incremental costs, the product should be processed further, else not.

Incremental Analysis of Corn Oil:

Incremental Income per lb. = Incremental selling price per lb. – Incremental costs per lb.

                                                   = (Sales value per lb. after processing – Sales value per lb. At split-off) – Estimated further processing cost

                                                         = ($ 0.60 per lb. - $ 0.30 per lb.) - $ 0.15 per lb.

                                                         = $ 0.15 per lb.

Therefore if Corn Oil is processed further and then sold, the company will have incremental net income of $ 0.15 per lb.    

Incremental Analysis of Corn Meal:

Incremental Income per lb. = Incremental selling price per lb. – Incremental costs per lb.

                                                   = (Sales value per lb. after processing – Sales value per lb. At split-off) – Estimated further processing cost

                                                         = ($ 0.55 per lb. - $ 0.10 per lb.) - $ 0.46 per lb.

                                                         = - $ 0.01 per lb.

Therefore if Corn Meal is processed further and then sold, the company will have incremental net loss of $ 0.01 per lb.

Final Decision:

Since further processing of Corn Oil provide incremental income of $ 0.15 per lb., it should be processed further.

However, further processing of Corn meal will result in incremental loss of $ 0.01 per Lb. and thus it should not be processed further.

Note: Joint costs incurred at split off point should not be considered in above analysis being sunk cost (Historical Cost).