Question

Prosperous Production makes two products from a common input. Joint processing costs up to the split-off point total $42,300 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 AE Product CJ Total Allocated joint processing costs $ 25,600 $ 16,700 $ 42,300 Sales value at split-off point $ 32,200 $ 21,500 $ 53,700 Costs of further processing $ 16,700 $ 17,300 $ 34,000 Sales value after further processing $ 48,500 $ 40,200 $ 88,700 What is the minimum amount the company should accept for Product AE if it is to be sold at the split-off point

Answer 1

Prosperous Production

The minimum amount the company should accept for Product AE if it is to be sold at the split-off point is:

= $ 32,200.

Step-by-step explanation:

a) Data and Calculations:

Annual joint processing costs up to split-off = $42,300

Product AE Product CJ Total

Allocated joint processing costs $ 25,600 $ 16,700 $ 42,300

Sales value at split-off point $ 32,200 $ 21,500 $ 53,700

Costs of further processing $ 16,700 $ 17,300 $ 34,000

Sales value after further processing $ 48,500 $ 40,200 $ 88,700

b) If the company accepts any amount that is less than the sales value at the split-off point, it will not make enough profit as offered by the market. A further review shows that the company will lose $400 if it processes Product AE further than the split-off point. At the split-off point, it will make a gain of $6,600. After further processing, it will only record a gain of $6,200.