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 $95,000 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		18,000	pounds
B	$	4	per pound		23,000	pounds
C	$	12	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	$	40,000		$	5	per pound
B	$	40,000		$	7	per pound
C	$	11,250		$	15	per gallon

Required:
a.	Compute the incremental profit (loss) for each product.

     

b.	Which product or products should be sold at the split-off point?

Answer 1

a.

	Product A	Product B	Product C
Selling Price after further processing	$              5	$             7	$           15
Selling Price at the split off point	$              3	$             4	$           12
Incremental Revenue per pound or gallon	$              2	$             3	$             3
Total quarterly output in pounds or gallons	18,000	23,000	5,000
Total Incremental Revenue	$   36,000	$   69,000	$   15,000
Total incremental processing costs	$   40,000	$   40,000	$   11,250
Total incremental profit or loss	$   (4,000)	$   29,000	$     3,750

Product A should be sold at split off point.