Question

Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products
can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below
are cost and selling price data for a recent period.
		Sales Value	Cost to	Sales Value
		at Split-off	Process	after Further
		Point	Further	Processing
	Product 10	$60,000	$100,000	$190,000
	Product 12	15,000	30,000	35,000
	Product 14	55,000	150,000	215,000
Instructions
(a)	Determine total net income if all products are sold at the split-off point.
(b)	Determine total net income if all products are sold after further processing.
(c )	Using incremental analysis, determine which products should be sold at the split-off
	point and which should be processed further.
(d)	Determine total net income using the results from (c ) and explain why the net income
	is different from that determined in (b).

Answer 1

Ans.(a)	Calculation of Total income If all products are sold at split off point :
				Product 10		Product 12		Product 14		Total
	Sales value (at split-off)			60,000		15,000		55,000		130,000
	Less: Common Processing Cost (W.N.1)			46,154		11,538		42,308		100,000
				13,846		3,462		12,692		30,000
	Working Note :
	1) Calculation of product wise cost at split-off point :
					Cost
	Product 10		100,000 x 60,000/130,000		46154
	Product 12		100,000 x 15,000/130,000		11538
	Product 14		100,000 x 55,000/130,000		42308
	Total				100000
Ans.(b)	Calculation of Total income If all products are sold after further processing :
				Product 10		Product 12		Product 14		Total
	Sales value (after further proc.)			190,000		35,000		215,000		440,000
	Less: Common Processing Cost			46,154		11,538		42,308		100,000
	Less: Further Processing Cost			100,000		30,000		150,000		280,000
				43,846		(6,538)		22,692		60,000
Ans.(c)	Calculation of incremental profit for all products :
				Product 10		Product 12		Product 14
	Incremental Revenue (W.N. 1)			130,000		20,000		160,000
	Less: Incremental Cost			100,000		30,000		150,000
	Increase (Decrease) in profit			30,000		(10,000)		10,000
	Working Note :
	1) Calculation of incremental revenue :
					Product 10		Product 12		Product 14
	Sales value (after further processing)				190,000		35,000		215,000
	Sales value (at split-off)				60,000		15,000		55,000
	Incremental Revenue				130,000		20,000		160,000
Ans.(d)	Calculation of Net income using the results from (c) :
				Product 10		Product 12		Product 14
	Sales value (at split-off)			60,000		15,000		55,000
	Add: Incremental profit			30,000		(10,000)		10,000
	Total Net profit			90,000		5,000		65,000
	Explanation:
1)	Product 1 should be futher processed because the net profit increased by $30,000
2)	Product 2 should not be futher processed because the net profit will decreased by $10,000
3)	Product 3 should be futher processed because the net profit increased by $10,000