Question

Posh Pillows manufactures two products, pillows and cushions, from a joint process. Pillows are allocated $7000 of the total joint costs of $30,000. There are 2500 pillows produced and 2500 cushions produced each year. Pillows can be sold at the split-off point for $14 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8500 and sold for $18 for each deluxe pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income would be

Answer 1

The net profit will increase by $11,500.

Explanation:

The number of pillows and cushions produced is 2,500 units and 2,500 units respectively.

The split-off point price is given at $14 per unit.

The additional cost of producing deluxe pillows is $8,500.

The price of deluxe pillows is $18 per unit.

The change in net income by producing deluxe pillows is

=Profit-split off point sales

=selling price-additional costs-split off point sales

=$18*2,500-$8,500-$10*2,500

=$45,000-$8,500-$25,000

=$11,500