Question

Gusler company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $98,000 per quarter. 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 $ 3 per pound 10,000 pounds B $ 7 per pound 22,000 pounds C $ 11 per gallon 5,000 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 $ 53,000 $ 7 per pound B $ 38,000 $ 12 per pound C $ 18,000 $ 20 per gallon Which products should be processed further?

Answer 1

Products to be further processed are estimated as:

Incremental profit/loss=(Units produced*selling price after processing)-Additional costs-(Units*selling price at split off)

Incremental profit/loss for A=(10,000*7)-53,000-(10,000*3)

Incremental profit/loss for A=$70,000-$53,000-$30,000

Incremental loss for A=-$13,000

Incremental profit/loss for B=(22,000*12)-$38,000-(22,000*7)

Incremental profit/loss for B=264,000-38,000-154,000

Incremental profit  for B=72,000

Incremental profit/loss for C=(5000*20)-18,000-(5000*11)

Incremental profit/loss for C=100,000-18,000-55,000

Incremental profit for C=$27,000

Products B and C have incremental profit,thus,they should be processed further.