Question

Product X-302 is one of the joint products in a joint manufacturing process at Conn Ltd. Management is considering whether to sell X-302 at the split-off point or to process X-302 further into Xylene. The following data have been gathered:

-Selling price of X-302
-Variable cost of processing X-302 into Xylene.
-The avoidable fixed costs of processing X-302 into Xylene.
-The selling price of Xylene.
-The joint cost of the process from which X-302 is produced.
Which of the above items are relevant in a decision of whether to sell the X-302 as is or process it further into
Xylene?
A) Selling price of X-302
Variable cost of processing X-302 into Xylene
The avoidable fixed costs of processing X-302 into Xylene.
The joint cost of the process from which X-302 is produced.
B) Variable cost of processing X-302 into Xylene.
The avoidable fixed costs of processing X-302 into Xylene. The joint cost of the process from which X-302 is produced.
C) Selling price of X-302
Variable cost of processing X-302 into Xylene.
The selling price of Xylene.
D) None of the above

Answer 1

Management should consider costs and revenues directly affected by the decision, so the relevant items are the selling price of X-302, the variable cost and avoidable fixed costs of processing it into Xylene, and the selling price of Xylene. The joint cost is a sunk cost and not relevant. Thus, option C is correct.

Step-by-step explanation:

When determining whether to sell Product X-302 as is or process it further into Xylene, Conn Ltd management should consider the relevant costs associated with each option. These include the selling price of X-302, the variable cost of processing X-302 into Xylene, the avoidable fixed costs of processing X-302 into Xylene, and the selling price of Xylene. The joint cost of the process from which X-302 is produced is not relevant, as it is a sunk cost that will be the same regardless of whether X-302 is sold as is or processed further.

It is crucial to calculate whether the additional revenue from selling Xylene exceeds the additional variable and avoidable fixed costs associated with processing X-302 into Xylene. Any increase in costs must be justified by a corresponding or greater increase in revenue to ensure profitability. As such, option C (selling price of X-302, variable cost of processing X-302 into Xylene, the selling price of Xylene) presents the relevant items for this decision.