Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter.

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 per pound 15,000
B $8 per pound 20,000
C $25 per gallon 4,000
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 $63,000 $20 per pound
B $80,000 $13 per pound
C $36,000 $32 per gallon
a. Compute the incremental profit (loss) for each product.

b. Which product or products should be sold at the split-off point and which product or products should be processed further? Show Computations.

Product                                         A                 B                        C

Incremental profit/(loss)             (3 ,000)            20,000         (8,000)

b

Process further  :  Product B

Sell at the split of point : Product A and C

Explanation:

Question a

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point are irrelevant to the decision to process further .  

Additional sales revenue = Sales revenue after further processing - sales revenue after split-off point .

Product                                         A                 B                        C

Sales after split of point                20                   13                     32

Sales at the split off point             (16)                  ( 8)                    (25)

Additional rev per unit                    4                       5                      7

Quantity                        ×              15,000            20,000             4,000

Additional sales rev                    60,000           100,000           28,000

Further processing cost             ( 63,000)        ( 80,000)         (36,000)

Incremental profit/(loss)            (3 ,000)            20,000         (8,000)

Question b

Products A and Product C should be  sold at the split of point

Doing so would save the the company the $11,000 in incremental losses ( 3,000+ 8,000).

Product B should be process further as it would produce an incremental profit of $20,000