Question

Net Realizable Value Method, Decision to Sell at Split-off or Process Further

Pacheco, Inc., produces two products, overs and unders, in a single process. The joint costs of this process were $60,000, and 15,000 units of overs and 36,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $20,000; unders, $23,040. Overs sell for $2.00 per unit; unders sell for $3.14 per unit.

Required:

1. Allocate the $60,000 joint costs using the estimated net realizable value method.

	Allocated Joint Cost
Overs	$
Unders	$

2. Suppose that overs could be sold at the split-off point for $1.80 per unit. Should Pacheco sell overs at split-off or process them further?
Overs should not be processed further as there will be $_________ more profit if sold at split-off.

Answer 1

1.First let us calculate Net Realizable Value ( NRV ) of Overs and Unders.

Particulars	Overs	Unders
Sales value of units produced ( selling price per unit * units produced )	$30,000 ( $2 * 15,000 units )	$113,040 ( $3.14 * 36,000 units )
less : Additional processing cost	$20,000	$23,040
Net Realizable Value ( NRV )	$10,000	$90,000
Total NRV = $10,000 + $90,000 = $100,000

Now let us allocate joint cost

	Allocated joint cost ( NRV of individual product / Total NRV ) * Total joint cost
Overs	$6,000 ( $10,000 / $100,000 ) * $60,000
Unders	$54,000 ( $90,000 / $100,000 ) * $60,000

2. Calculation of profits from overs if the same is sold at split-off point

particulars	$
Sales value at split-off point ( 15,000 units * $1.80 )	27,000
less : allocated joint cost	6,000
profit	21,000

Calculation of profits from overs if the same is sold after further processing it.

Particulars	$
Sales value when sold after processing ( 15,000 units * $2 )	30,000
less : further processing cost	20,000
less : allocated joint cost	6,000
Profit	4,000

Final answer : Overs should not be processed further as there will be $17,000 ( i.e. $21,000 - $4,000 ) more profit if sold at split-off.