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 $380,000 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	$	26.00	per pound		14,200	pounds
B	$	20.00	per pound		22,100	pounds
C	$	32.00	per gallon		5,400	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	$	86,490	$	31.70	per pound
B	$	125,095	$	26.70	per pound
C	$	57,700	$	40.70	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?

Andretti Company has a single product called a Dak. The company normally produces and sells 82,000 Daks each year at a selling price of $46 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	6.50
Direct labor		9.00
Variable manufacturing overhead		2.50
Fixed manufacturing overhead		4.00	($328,000 total)
Variable selling expenses		2.70
Fixed selling expenses		4.50	($369,000 total)
Total cost per unit	$	29.20

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 106,600 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 30% above the present 82,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 106,600 Daks each year. A customer in a foreign market wants to purchase 24,600 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $19,680 for permits and licenses. The only selling costs that would be associated with the order would be $2.10 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 900 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 82,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside

Answer 1

Solution 1:

Computation of financial adavantage / disadvantage of further processing
Particulars	Product A		Product B		Product C
	Details	Amount	Details	Amount	Details	Amount
Sale Value after further processing	14200*31.70	$450,140.00	22100*26.70	$590,070.00	5400*40.70	$219,780.00
Less: Sale value at split off Point	14200*26	$369,200.00	22100*20	$442,000.00	5400*32	$172,800.00
Incremental Revenue - Further Processing		$80,940.00		$148,070.00		$46,980.00
Less: Further Processing Cost		$86,490.00		$125,095.00		$57,700.00
Financial advantage (Disadvantage) for further processing		-$5,550.00		$22,975.00		-$10,720.00

As product A & C is showing financial disadvantage if they are further processed, hence these products should be sold at split off point. Further Product B is showing financial advantage for further processing, hence same should be further processed.