Question

Net Realizable Value Method, Decision to Sell at Split-off or Process Further

Pacheco, Inc., produces two products, overs and unders, in a single process. The joint costs of this process were $60,000, and 14,000 units of overs and 36,000 units of unders were produced. Separable processing costs beyond the split-off point were as follows: overs, $18,000; unders, $23,040. Overs sell for $2.00 per unit; unders sell for $3.14 per unit.

Required:

1. Allocate the $60,000 joint costs using the estimated net realizable value method.

	Allocated Joint Cost
Overs	$
Unders	$

2. Suppose that overs could be sold at the split-off point for $1.80 per unit. Should Pacheco sell overs at split-off or process them further?
Overs be processed further as there will be $ profit if sold at split-off.

Answer 1

	Overs	Unders
units	14000	36000
Price	2	3.14
units*price	28000	113040
separable	18000	23040
Difference	10000	90000

1.Ans:

Thus the cost of $60,000 allocated in overs $6000 (=60,000 * 10,000/100,000)

and unders 54,000 (60,000 * 90,000/100,000)

The allocated joint cost= Overs-$6000

                                        Unders-$54000

2. Suppose that overs could be sold at the split-off point for $1.80 per unit. Should Pacheco sell overs at split-off or process them further?

Overs be processed further as there will be $ profit if sold at split-off.

Without processing further there would be a realisation of profits of $12075 thus could be sold at the split-off point for $1.80 per unit.

Particulars	Overs	Unders
Number of units	14000	36000
Selling price per unit	$                          1.80	$                     3.14
Sales value	$               25,200.00	$        113,040.00
Minus costs	$                               -	$          23,040.00
Net realizable value	$               25,200.00	$          90,000.00
joint cost allocation	$               13125	$          46875
Profit	$               12075	$          43125