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 $320,000 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	$	14.00	per pound		11,800	pounds
B	$	8.00	per pound		18,500	pounds
C	$	20.00	per gallon		3,000	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	$	56,850	$	18.50	per pound
B	$	80,875	$	13.50	per pound
C	$	31,300	$	27.50	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

1.)	Sales value at Split-off Point
	Product	Amount in $
	A ( 14 x 11,800   )	165,200
	B ( 8 x 18,500 )	148,000
	C ( 20 x 3,000 )	60,000
	Total	373,200
	Joint Cost	$320,000
	Allocation of Joint cost in the ratio of sale at split-off point
	Product	Amount in $
	A	141,651	( 320,000 x 165,200 ) / 373,200
	B	126,902	(320,000 x 148,000) / 373,200
	C	51,447	(320,000 x 60,000) / 373,200
	Total Allocated Joint Cost	320,000
	Calculation of Profit at sale at split-off point
	Product	A	B	C
	Sale value at split off point	165,200	148,000	60,000
	Less: Allocated Joint Cost	141,651	126,902	51,447
	Profit at split-off point	23,549	21,098	8,553
	Calculation of Profit after further processing
	Product	A	B	C
	Sale value after further processing	218,300	249,750	82,500
	Less: Allocated Joint Cost	141,651	126,902	51,447
	Less: cost of further processing	56,850	80,875	31,300
	Profit (loss) after further processing	19,799	41,973	-247
	Financial Advantage (disadvantage ) from further processing
	Product	A	B	C
	Profit (loss ) after further processing	19,799	41,973	-247
	Less: Profit at split-off point	23,549	21,098	8,553
	Financial Advantage (Disadvantage )	-3,750	20,875	-8,800
	Financial (disadvantage) from further processing of A is -$3.750.
	Financial advantage from further processing of B is $20,875.
	Financial (disadvantage ) from further processing of C is -$8,800.
2.)	Recommendations
	Product
	A	Sell at split off point
	B	Process further
	C	Sell at split off point