Question

Dunning Farms, Inc. raises organic turkeys. The total cost to process 73,000 turkeys is $28,500. Each turkey can be sold at this point for $65 each or go through a smoking process (further processing) and be sold for $85 each. The total cost of the smoking process is $260,000. Should the turkeys be sold at the split-off point or processed further? Show your calculations.

Answer 1

Solution :

As per the information given in the question we have

Upto the split off point :

No. of turkeys processed = 73,000 ; Total cost of processing upto split off point = $ 28,500

Selling price per turkey upto split off point = $ 65 ;

Total selling price upto split off point = No. of turkeys processed * Selling price per turkey upto split off point

= 73,000 * $ 65 = $ 4,745,000

On Further processing :

No. of turkeys processed = 73,000 ; Total cost of processing upto split off point = $ 28,500

Further processing i.e, Smoking cost = $ 260,000 ;

Total cost of processing = Total cost of processing upto split off point + Further processing i.e, Smoking cost

= $ 28,500 + $ 260,000 = $ 288,500 ;

Selling price per turkey after further processing = $ 85 ;

Total selling price on further processing = No. of turkeys processed * Selling price per turkey after further processing

= 73,000 * $ 85 = $ 6,205,000

Calculation whether the turkeys be sold at the split-off point or processed further :

The additional cost on further processing = Total cost of processing - Total cost of processing upto split off point

= $ 288,500 - $ 28,500 = $ 260,000

The additional revenue on further processing = Total selling price on further processing - Total selling price upto split off point

= $ 6,205,000 - $ 4,745,000

= $ 1,460,000

The additional revenue on further processing at $ 1,460,000 is greater than the additional cost on further processing of $ 260,000.

Since the additional revenue on further processing is greater than the additional cost on further processing the turkeys should be further processed.