Question

What is of key importance for a company whose products can be processed further?

Answer 1

A company that has products that can be processed further has to make a major decision that is to determine the point at which to sell the product which means when is it no longer cost effective to continue the processing of the product before selling it out in the market.

Split Off point is the point where where some products are processed further and recieve additional processing and on the other hand some products are removed from production and sold. The key decision for a company is to determine the Split Off point.

The costs that have been shared by products up to the split off point are known as joint costs and a company should consider these costs while determining th Split Off point.

For eg. Once Milk is processed it can either be sold directly or further by products can be made by processing it further such as curd, yoghurt, ice cream etc. Here the joint costs are The costs of processing the milk to the stage at which it can be sold or processed further. For eg, The cost for Yoghurt would be the Joint Cost incurred while producing Milk and extra costs for processing it further into Yoghurt.