Question

Porky Products Company manufactures three products from a pig in a joint processing operation. Joint processing costs up to the split-off point total $40,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities. The additional processing costs and the sales value after further processing for each product (on an annual basis) are shown below:

Product	Additional Processing Costs	Sales Value after Further Processing	Sales Value at Split-off Point
Ham	$20,000	$44,000	$20,000
Bacon	$30,000	$60,000	$35,000
Pork chops	$12,000	$50,000	$30,000

Required:

Which product or products should be sold at the split-off point, and which product or products

should be processed further?

Answer 1

The Company will only further produce the product whose incremental sales value is more than the additional processing cost. The cost which has already been incurred i.e. Joint Processing cost will not be relevant as it will not affect the decision as it has already been incurred before the further process.

Hence if the Incremental Profit (Incremental Sales Value - Additional Cost) is positive, the product will be processed further otherwise it will be sold at the split off point.

As the product Ham & Pork Chops have positive Incremental Profit they will be produced further and Bacon has negative Incremental Profit and hence will be sold at split-off point.