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 13,000 units of overs and 35,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $16,000; unders, $19,900. 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.

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 13,000 units of overs and 35,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $16,000; unders, $19,900. 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 $ 6,000 Unders $ 54,000 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 $ 10,000 more profit if sold at split-off.

Answer 1

Problem 1 – Pacheco, Inc.

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

Part 1 – Allocation of Joint Cost

First of all we need to calculate the Net Realizable Value (NRV) to allocate joint cost

Product	Over	Under	Total
Quantity in Units	13,000	35,000
Unit Selling Price if processed further	$2	$3.14
Total Sales Value	$26,000	$109,900	$135,900
Less: Separable Processing Costs	$16,000	$19,900	$35,900
Net Realizable Value	$10,000	$90,000	$100,000

Allocation of Joint Cost
Over (Joint Cost 60,000 / Total NRV 100,000 x NRV of Over 10,000)	$6,000
Under (Joint Cost 60,000 / Total NRV 100,000 x NRV of Over 90,000)	$54,000

Part 2 – Analysis whether Pacheco should sell overs at split-off or process them further?

	Over
Quantity in Units	13,000
Unit Selling Price after further processing	$2.00
Unit Selling Price at split off point	$1.80
Incremental Revenue (13000*(2 - 1.80)	$2,600
Less: Costs after split off	$16,000
Incremental Loss	($13,400)

Pacheco should not sell the Overs after processing further. Overs should sell at Split off Point since there is higher profit at split off point.

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Pls ask separate question for remaining parts