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 $330,000 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	$	16.00	per pound		12,200	pounds
B	$	10.00	per pound		19,100	pounds
C	$	22.00	per gallon		3,400	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	$	61,390	$	20.70	per pound
B	$	87,645	$	15.70	per pound
C	$	35,300	$	29.70	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?

Answer 1

1.
Calculation of financial advantage (disadvantage) of further processing
	Product A	Product B	Product C
Selling price after processing	$20.70	$15.70	$29.70
Selling price at split off point	$16.00	$10.00	$22.00
Incremental selling price	$4.70	$5.70	$7.70
Number of units sold	$12,200	$19,100	$3,400
Incremental sale revenue	$57,340	$108,870	$26,180
Less: Additional processing costs	-$61,390	-$87,645	-$35,300
Incremental profit (loss)	-$4,050	$21,225	-$9,120
The financial disadvantage of further processing product A and product C is $4,050 and $9,120 respectively.
The financial advantage of further processing product B is $21,225
The joint costs is not considered as the joint cost would remain same under both the alternatives and therefore not relevant costs.
2.
Company should process product B further as this would increase the profit of the company.
Company should sell product A and C at split off point as processing further would reduce the profit of the company.