Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $345,000 per quarter. For financial reporting purposes, 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	$	19.00	per pound		12,800	pounds
B	$	13.00	per pound		20,000	pounds
C	$	25.00	per gallon		4,000	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	$	68,500	$	24.00	per pound
B	$	98,250	$	19.00	per pound
C	$	41,600	$	33.00	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

Working Notes:
	Calculation of Net income if all products are sold at split off point
		Product A	Product B	Product C
	Sales Revenue	$                  243,200	$                   260,000	$                 100,000
		(12,800 X $ 19)	(20,000 X $ 13)	(4000 X $ 25)
Solution:1
	Calculation of Net income if all products are sold at after further processing
		Product A	Product B	Product C	Total
	Sale value After Further Processing	$                  307,200	$                   380,000	$                 132,000	$             819,200
		(12,800 X $ 24)	(20,000 X $ 19)	(4000 X $ 33)
	Less:
	Sales value at Split off point	$                  243,200	$                   260,000	$                 100,000	$             603,200
	Increamental revenue	$                    64,000	$                   120,000	$                   32,000	$             216,000
	Less: Cost to process further	$                    68,500	$                     98,250	$                   41,600	$             208,350
	Income (Loss)	$                     -4,500	$                     21,750	$                    -9,600	$                  7,650
Solution:2
	Calculation of which product processed further	Increamental Profit (Loss)	Decission
	Product A	$                     -4,500	Do not process further
	Product B	$                    21,750	Further process
	Product C	$                     -9,600	Do not process further