Question

In: Accounting

Ibsen Company makes two products from a common input. Joint processing costs up to the split-off...

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?

Solutions

Expert Solution

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)

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