Winnovia Mills processes cotton in a joint process that yields two joint product

Question

Winnovia Mills processes cotton in a joint process that yields two joint products: fabric and yarn. May's joint cost is $80,000, and the sales values at split-off are $240,000 for fabric and $200,000 for yarn. If the products are processed beyond split-off, the final sales value will be $360,000 for fabric and $280,000 for yarn. Additional costs of processing are expected to be $80,000 for fabric and $68,000 for yarn.

a. Should the products be processed further? Show computations.

b. Were any revenues and/or costs irrelevant to the decision? If so, what were they and why were they irrelevant?

Explanation / Answer

a) Fabric Incremental revenues 360,000- 240,000= 120,000 incremental costs 80,000 Since revenues> costs process further. Yarn incremental revenues 280,000- 200,000= 80,000 Incremental costs 68,000 Once again since revenues> costs process further. Joint costs were irrelevant ($80,000).They are sunk costs. The key factor is how much additional revenue will you get versus how much will it cost you.

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