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 $335,000 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	$	17.00	per pound		12,400	pounds
B	$	11.00	per pound		19,400	pounds
C	$	23.00	per gallon		3,600	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	$	63,720	$	21.80	per pound
B	$	91,120	$	16.80	per pound
C	$	37,360	$	30.80	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

Part 1
	Computation of net income at split-off point
		Prodcut A	Prodcut B	Prodcut C	Total
	Sales value at split-off point	$2,10,800	$2,13,400	$82,800	$5,07,000
	Less:Joint cost	$1,39,286	$1,41,004	$54,710	$3,35,000
	Net Income	$71,514	$72,396	$28,090	$1,72,000
	Computation of net income after further processing
		Prodcut A	Prodcut B	Prodcut C	Total
	Sales value after further processing	$2,70,320	$3,25,920	$1,10,880	$7,07,120
	Less:Joint cost	$1,39,286	$1,41,004	$54,710	$3,35,000
	Less:Additional cost	$63,720	$91,120	$37,360	$1,92,200
	Net Income	$67,314	$93,796	$18,810	$1,79,920
	Computation of Incremental profit
		Prodcut A	Prodcut B	Prodcut C
	Incremental Revenue	$59,520	$1,12,520	$28,080
	Less:Incremental costs	$63,720	$91,120	$37,360
	Incremental Profit/(Loss)	-$4,200	$21,400	-$9,280
Part 2		Incremental Profit/(Loss)	Decision
	Prodcut A	-$4,200	Sales at split-off point
	Prodcut B	$21,400	Sale after Further processing
	Prodcut C	-$9,280	Sales at split-off point