In: Accounting
Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $395,000 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 | $ | 29.00 | per pound | 14,800 | pounds | |
B | $ | 23.00 | per pound | 23,000 | pounds | |
C | $ | 35.00 | per gallon | 6,000 | 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 | $ | 94,800 | $ | 35.00 | per pound |
B | $ | 137,500 | $ | 30.00 | per pound |
C | $ | 65,200 | $ | 44.00 | 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?
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
Product A |
Product B |
Product C |
|
Selling price after further processing |
35.00 |
30.00 |
44.00 |
Selling price at the split-off point |
29.00 |
23.00 |
35.00 |
Incremental revenue per pound or gallon |
6.00 |
7.00 |
9.00 |
Total quarterly output in pounds or gallons |
14800 |
23000 |
6000 |
Total incremental revenue |
88,800.00 |
161,000.00 |
54,000.00 |
Total incremental processing costs |
94,800.00 |
137,500.00 |
65,200.00 |
Total incremental profit or loss |
(6,000.00) |
23,500.00 |
(11,200.00) |
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?
Products should be sold at the split-off point = Product A & Product C
Product should be processed further = Product B