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 $365,000 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	$	23.00	per pound		13,600	pounds
B	$	17.00	per pound		21,200	pounds
C	$	29.00	per gallon		4,800	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	$	78,540	$	28.40	per pound
B	$	113,230	$	23.40	per pound
C	$	50,560	$	37.40	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

Solution 1)

	Product A	Product B	Product C
Financial advantage (Disadvantage)	$(5100)	$22450	$(10240)

2) Product A and C should be sold at splitoff point and Product B should be further processes

Explanation

1)Differential cost refers to the difference between the cost of two alternative decisions. The cost occurs when a business faces several options

Calculation of Incremental Revenue or (Loss) ie Financial Advantage or Disadvantage

	Product A	Product B	Product C
Units (a)	13600	21200	4800
Selling Price at splitoff point	$23	$17	$29
Selling price after further Processing	$28.40	$23.40	$37.40
Incremental Selling price per unit	$5.4	$6.4	$8.4
Total incremental Revenue(a+b)	$73440	$135680	$40320
Less Incremental cost
Addition Processing Cost	$78540	$113230	$50560
Financial advantage (disadvantage)	$(5100)	$22450	$(10240)

* Incremental Selling Price Per unit = unit Selling price After Split off Point Less Unit Selling price at Split off point

* Joint processing cost upto splitoff point is not relevant as it going to be inccured whatever will be chosen whether sold at splitoff or further processing