Question

Salt Island Pottery Ltd. manufactures two​ products, bowls and​ plates, from a joint process. Bowls are allocated $5,000 of the total joint costs of $25,000. There are 1,500 bowls produced and 1,500 plates produced each year. Bowls can be sold at the split​-off point for​ $12 per​ unit, or they can be processed further into a deluxe bowl for additional processing costs of $5,000 and sold for​ $16 for each deluxe bowl. By how much will operating income change if the company chooses to process deluxe​ bowls?Salt Island Pottery Ltd. manufactures two​ products, bowls and​ plates, from a joint process. Bowls are allocated of the total joint costs of . There are bowls produced and plates produced each year. Bowls can be sold at the split​-off point for​ $12 per​ unit, or they can be processed further into a deluxe bowl for additional processing costs of and sold for​ $16 for each deluxe bowl. By how much will operating income change if the company chooses to process deluxe​ bowls?

Answer 1

If the company chooses to process the bowls into deluxe bowls, the operating income will increase by $1,000.

Step-by-step explanation:

In this scenario, Salt Island Pottery Ltd. manufactures bowls and plates from a joint process. The company incurs total joint costs of $25,000, and bowls are allocated $5,000 of these costs. Each year, the company produces 1,500 bowls and 1,500 plates. The bowls can be sold at the split-off point for $12 per unit, or they can be processed further into deluxe bowls at an additional cost of $5,000 and sold for $16 per deluxe bowl.

If the company chooses to process the bowls into deluxe bowls, the operating income will change by the difference between the additional revenue from selling the deluxe bowls and the additional processing costs. In this case, the additional revenue is calculated by multiplying the number of bowls produced (1,500) by the difference in selling price between the deluxe bowls and regular bowls ($16 - $12 = $4). The additional revenue would be $6,000 (1,500 bowls x $4), and since the additional processing costs are $5,000, the operating income will increase by $1,000 ($6,000 - $5,000).