Question

Joint Cost Cheyenne, Inc. produces three products from a common input. The joint costs for a typical quarter follow: Direct materials Direct labor Overhead $45,000 55,000 60,000 The revenues from each product are as follows: Product A $75,000 Product B 80,000 Product C 30,000 Management is considering processing Product A beyond the split-off point, which would increase the sales value of Product A to $116,000. However, to process Product A further means that the company must rent some special equipment costing $17,500 per quarter. Additional materials and labor also needed would cost $12,650 per quarter

a. What is the gross profit currently being earned by the three products for one quarter?
b. What is the effect on quarterly profits if the company decides to process Product A further?

Answer 1

a. Total revenue from the 3 products:

= $75,000 + $80,000 + $30,000

= $185,000

Total costs at the split-off point:

= $45,000 + $55,000 + $60,000

= $160,000

Gross profit currently being earned

= Total revenue - Total costs

= $185,000 - $160,000

= $25,000

b. Incremental revenue from product A:

= $116,000 - $75,000

= $41,000

Incremental costs = Rent for special equipment + Materials and labor cost

= $17,500 + $12,650

= $30,150

Incremental gross margin = Incremental revenue - Incremental costs

= $41,000 - $30,150

= $10,850

So, if product A is further processed, quarterly profits will increase by $10,850.