Question

Mitchener Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $300,000 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. The additional processing costs and sales value after further processing for each product (on an annual basis) are:

	Product	Sales Value at Split-Off	Further Processing Costs	Sales Value After Further Processing
	M	$200,000	$ 85,000	$300,000
	N	155,000	110,000	285,000
	P	325,000	65,000	370,000

The "Further Processing Costs" consist of variable and avoidable fixed costs.

INSTRUCTIONS Determine which product or products should be sold at the split-off point, and which product or products should be processed further? When complete, answer each of the following by selecting the correct match from the list provided.

- What is the incremental revenue for Product M?       - .    What is the incremental income (loss) for Product M?       - .    What is the incremental revenue for Product N?       - What is the incremental income (loss) for Product N?       - .    What is the incremental revenue for Product P?       - What is the incremental income (loss) for Product P? .    Which of the product or products, should be processed further?

A. $(20,000) B. $15,000 C. $45,000 D. $130,000 E. $100,000 F. $20,000 G. M and N

Answer 1

First we need to calculate the incremetal revenue and incremental Profit or loss for each product as under

Product	Sales Value	Further	Sales Value
	at Split-Off	Processing	After Further
		Costs	Processing	Incremental revenue	incremental income (loss)
	A	B	C	D=C-A	E=D-B
M	200000	85000	300,000	100,000	15,000
N	155000	110000	285000	130,000	20,000
P	325000	65000	370,000	45,000	(20,000)

What is the incremental revenue for Product M?	100,000
What is the incremental income (loss) for Product M?	15,000
What is the incremental revenue for Product N?	130,000
What is the incremental income (loss) for Product N?	20,000
What is the incremental revenue for Product P?	45,000
What is the incremental income (loss) for Product P?	(20,000)
Which of the product or products, should be processed further?	M and N