Question

Ibsen Company makes two products from a common input. Joint processing costs up to the split-off point total $46,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

	Product X			Product Y			Total
Allocated joint processing costs	$	18,400		$	27,600		$	46,000
Sales value at split-off point	$	20,000		$	30,000		$	50,000
Costs of further processing	$	24,300		$	18,600		$	42,900
Sales value after further processing	$	38,000		$	58,500		$	96,500

Required:

a. What is financial advantage (disadvantage) of processing Product X beyond the split-off point? (Negative amount should be indicated by a minus sign.)

b. What is financial advantage (disadvantage) of processing Product Y beyond the split-off point?

c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Answer 1

a.	Product X
	Sales value after further processing	38,000
	- Sales value at split-off point	20,000
	Incremental revenue	18,000
	- Further processing cost	24,300
	Disadvantage in further processing	(6,300)
b.	Product Y
	Sales value after further processing	58,500
	- Sales value at split-off point	(30,000)
	Incremental revenue	28,500
	- Further processing cost	18,600
	Advantage in further processing	9,900
c.	13,700
	Sale value at split of point - Disadvantage with further processing
	(20,000 - 6,300)
d.	39,900
	Sale value at split of point + Advantage with further processing
	(30,000 + 9,900)