Question

Kelp Company produces three joint products from seaweed. At the split-off point, three basic products emerge: Sea Tea, Sea Paste, and Sea Powder. Each of these products can either be sold at the split-off point or be processed further. If they are processed further, the resulting products can be sold as delicacies to health food stores. Cost and revenue information is as follows.

	Sales Value and Additional Costs If Processed Further
Product	Pounds Produced		Sales Value at Split-Off				Final Sales Value				Additional Cost
Sea Tea	9,000		$	60,000			$	90,000			$	35,000
Sea Paste	3,900			71,400				160,000				50,000
Sea Powder	2,000			70,000				85,000				14,000

Required:

a-1. Compute the incremental benefit (cost) of further processing to these products.

a-2. Which products should Kelp process beyond the split-off point?

b. At what price per pound would it be advantageous for Kelp Company to sell Sea Paste at the split-off point rather than process it further?

Answer 1

1		Sea Tea	Sea Paste	Sea Powder
	Sales value if sold at the split-off point	60,000	71,400	70,000
	Sales value if processed further	90,000	160,000	85,000
	Incremental cost of further processing	35,000	50,000	14,000
	Incremental proceeds if processed further	55,000	110,000	71,000
	Incremental benefit (cost) of further processing	(5,000)	38,600	1,000
2	Sea powder and sea paste
3	Minimum price per pound	28.21
	Incremental proceeds if processed further	110,000
	Sales value at split-off point	71,400
	Additional benefit needed to sell at split-off point	38,600
	Divided by: Number of pounds	3,900
	Incremental benefit per pound needed to sell at split-off point	9.90
	Add: Current price per pound at split-off point (71,400/3,900)	18.31
	Minimum price per pound needed to sell at split-off point	28.21