Question

Iaukea Company makes two products from a common input. Joint processing costs up to the split-off point total $47,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Product X Product Y Total
Allocated joint processing costs $17,900 $27,200 $45,100
Sales value at split-off point $25,400 $37,000 $62,400
Costs of further processing $22,400 $16,700 $39,100
Sales value after further processing $47,000 $54,700 $101,700

Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?

Answer 1

Product Net monetary advantage

X (800)

Y 1,000

Step-by-step explanation:

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 costs incurred up to the split-off point are irrelevant to the decision to process further .

Product X

$

Additional sales revenue from further processing

( 47,000-25,400) 21600

Further processing cost (22,400)

Net monetary advantage (800)

Product Y

$

Additional sales revenue from further processing

( 54,700-37,000) 17,700

Further processing cost (16,700)

Net monetary advantage 1,000

Product Net monetary advantage

X (800)

Y 1,000