Question

In: Accounting

Kelp Company produces three joint products from seaweed. At the split-off point, three basic products emerge:...

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?

Solutions

Expert Solution

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

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