Question

Spencer Manufacturing Ltd. produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced. Data for Spencer Manufacturing Ltd.’s operations for the current year are as follows:

	Units Produced			Allocated Joint Production Cost			Sales Value at Split-off
Product P		4,000		$	38,000		$	48,000
Product Q		7,000		$	59,000		$	57,000
Product R		2,000		$	18,000		$	20,000

Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $85,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $28,000.

If profit is the only consideration for the company, which one of the products should be sold at the split-off point and which ones should be processed further?

Answer 1

Only Product R, should be processed further and product P & Q should be sold at spilt point since, the cost of further processing is higher than incremental revenue.

Product	Sales Value at Split-off (A)	Final Selling price (B)	Additional Cost ( C)	Net Selling price post processing (D = B-C)	Additonal Profit, if further processed (D-A)
P	$                           48,000.0	$                50,000.0	$           10,000.0	$              40,000.0	$                  (8,000.0)
Q	$                           57,000.0	$                85,000.0	$           35,000.0	$              50,000.0	$                  (7,000.0)
R	$                           20,000.0	$                28,000.0	$              6,000.0	$              22,000.0	$                     2,000.0