Question

XYZ Company makes two products, W and P, in a joint process. At the split-off point, 45,000 units of Product W and 70,000 units of Product P are available each month. Monthly joint production costs total $184,000 and are allocated to the two products equally. Product W can either be sold at the split-off point for $6.10 per unit or it can be processed further and then sold for $8.80 per unit. If Product W is processed further, additional processing costs of $3.20 per unit will be incurred. Product P can also be sold either at the split-off point for $4.25 per unit or it can be processed further and then sold for $7.60 per unit. If Product P is processed further, additional processing costs of $2.90 per unit will be incurred. However, the further processing of Product P will result in a loss of 6,000 units (i.e., only 64,000 units of Product P will be available for sale if it is processed further). The further processing of Product W will not result in the loss of any units. Assume XYZ Company makes all the correct sell or process further decisions. Calculate the amount of net income reported by XYZ Company last month.

Answer 1

		Product W	Product P
	Output at Split Off Point	45000	70000
	Analysis on Sell or Further Process Decision:	Product W	Product P
	Selling Price Post Further Processing	8.80	7.60
	Less: Selling Price at Split off Point	6.10	4.25
	Incremental Revenue	2.70	3.35
	Less: Additional Cost to Process	3.20	2.90
	Net Gain After Further Processing	-0.50	0.45
	Decision	Sell at Split off Point	Need Further Analysis
	Units After Further Processing		64000
	Total Gain		28800
	Product P:
	Output at Split Off Point	70000
	Selling Price at Split off Point	4.25
	Gain if Sold at Split Off	297500
	Product P should also be sold at Split off Point!
	Complete Profit & Loss Account:
	Revenue-Sell at Split Off Point
	Product P: 70000*4.25	297500
	Product W: 45000*6.10	274500
	Total Revenue	572000
	Less: Joint Cost	184000
	Net Gain	388000