Question

Joes Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 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	$	20.00	per pound		13,000	pounds
B	$	14.00	per pound		20,300	pounds
C	$	26.00	per gallon		4,200	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	$	70,950	$	25.10	per pound
B	$	101,905	$	20.10	per pound
C	$	43,780	$	34.10	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

Answer)

The decision of further processing of joint products is based in incremental analysis. If the incremental revenue is more than incremental costs, the product should be processed further, else not.

Incremental Analysis of product A:

Incremental Revenue= [(Incremental selling price per Pound X Quantity of product sold)] – Additional cost of further processing

                                           = [(Sales value per pound after processing – Sales value per pound at split-off) X Quantity of product sold] – Estimated further processing cost

                                            = [($ 25.10 per pound - $ 20.00 per pound) X 13,000 pounds] - $ 70,950

                                              = - $ 4,650

Therefore if Product A is processed further and then sold, the company will have financial disadvantage of $ 4,650.

Incremental Analysis of product B:

Incremental Revenue= [(Incremental selling price per Pound X Quantity of product sold)] – Additional cost of further processing

                                           = [(Sales value per pound after processing – Sales value per pound at split-off) X Quantity of product sold] – Estimated further processing cost

                                            = [($ 20.10 per pound - $ 14.00 per pound) X 20,300 pounds] - $ 101,905

                                              = $ 21,925

Therefore if Product B is processed further and then sold, the company will have financial advantage of $ 21,925.

Incremental Analysis of product C:

Incremental Revenue= [(Incremental selling price per gallon X Quantity of product sold)] – Additional cost of further processing

                                           = [(Sales value per gallon after processing – Sales value per gallon at split-off) X Quantity of product sold] – Estimated further processing cost

                                            = [($ 34.10 per gallon - $ 26.00 per gallon) X 4,200 gallons] - $ 43,780

                                              = - $ 9,760

Therefore if Product C is processed further and then sold, the company will have financial disadvantage of $ 9,760.

Final Decision:

· Since further processing of Product A provide results in financial disadvantage of $ 4,650, it should not be processed further and should be sold at split off point

· Since further processing of Product B provide results in financial advantage of $ 21,925, it should be processed further and the sold.

· Since further processing of Product C provide results in financial disadvantage of $ 9,760, it should not be processed further and should be sold at split off point

Note: Joint costs incurred at split off point should not be considered in above analysis being sunk cost (Historical Cost).