P7.57B
Prepare an incremental analysis for the decision whether to sell or process materials further.
14(LO 4) The following information is for a company that produces four types of microprocessors using the same production process. The common costs of these products, up to the split-off point, are $550,000. Common costs are allocated based on the quantity of output. The following information includes additional processing costs, the selling price of each product at the split-off point, and the selling price of each product after further processing:
Microprocessor
Number of
Units Produced
Selling Price at
Split-Off Point
Selling Price after
Further Processing
Additional Costs for
Further Processing
1
3,000
$10.00
$15.00
$14,800
2
4,000
9.50
12.25
8,500
3
2,500
11.00
15.70
12,000
4
500
7.75
10.25
1,250
Instructions
a.
Assuming only one product can be processed further, determine which one the company should choose. Briefly explain why.
Product 2
b.
Referring to your answer in part (a), identify which information is relevant to the decision to process this product further.
c.
If common costs up to the split-off point were allocated on the basis of the market values at the split-off point, would your decision in part (a) be different? Briefly explain why.
P7.57B
Prepare an incremental analysis for the decision whether to sell or process materials further.
14(LO 4) The following information is for a company that produces four types of microprocessors using the same production process. The common costs of these products, up to the split-off point, are $550,000. Common costs are allocated based on the quantity of output. The following information includes additional processing costs, the selling price of each product at the split-off point, and the selling price of each product after further processing:
| Microprocessor | Number of Units Produced | Selling Price at Split-Off Point | Selling Price after Further Processing | Additional Costs for Further Processing |
|---|---|---|---|---|
| 1 | 3,000 | $10.00 | $15.00 | $14,800 |
| 2 | 4,000 | 9.50 | 12.25 | 8,500 |
| 3 | 2,500 | 11.00 | 15.70 | 12,000 |
| 4 | 500 | 7.75 | 10.25 | 1,250 |
Instructions
a.
Assuming only one product can be processed further, determine which one the company should choose. Briefly explain why.
Product 2
b.
Referring to your answer in part (a), identify which information is relevant to the decision to process this product further.
c.
If common costs up to the split-off point were allocated on the basis of the market values at the split-off point, would your decision in part (a) be different? Briefly explain why.
Related questions
Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $335,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
| Product | Selling Price | Quarterly Output | ||||
| A | $ | 17.00 | per pound | 12,400 | pounds | |
| B | $ | 11.00 | per pound | 19,400 | pounds | |
| C | $ | 23.00 | per gallon | 3,600 | gallons | |
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
| Product | Additional Processing Costs | Selling Price | |||
| A | $ | 63,720 | $ | 21.80 | per pound |
| B | $ | 91,120 | $ | 16.80 | per pound |
| C | $ | 37,360 | $ | 30.80 | per gallon |
Required:
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?
Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $305,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
| Product | Selling Price | Quarterly Output | ||||
| A | $ | 11.00 | per pound | 11,200 | pounds | |
| B | $ | 5.00 | per pound | 17,600 | pounds | |
| C | $ | 17.00 | per gallon | 2,400 | gallons | |
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
| Product | Additional Processing Costs | Selling Price | |||
| A | $ | 50,340 | $ | 15.20 | per pound |
| B | $ | 71,170 | $ | 10.20 | per pound |
| C | $ | 25,600 | $ | 24.20 | per gallon |
Required:
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?
Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $335,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
| Product | Selling Price | Quarterly Output | ||||
| A | $ | 17.00 | per pound | 12,400 | pounds | |
| B | $ | 11.00 | per pound | 19,400 | pounds | |
| C | $ | 23.00 | per gallon | 3,600 | gallons | |
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
| Product | Additional Processing Costs | Selling Price | |||
| A | $ | 63,720 | $ | 21.80 | per pound |
| B | $ | 91,120 | $ | 16.80 | per pound |
| C | $ | 37,360 | $ | 30.80 | per gallon |
Required:
1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?
2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?
