Mandarin Furniture manufactures two products, pillows and cushions from the join

Question

Mandarin Furniture manufactures two products, pillows and cushions from the joint process. Pillows are allocated $7,000 of the total joint costs of $25,000. There are 2,500 pillows produced and $2500 cushions produced each year. Pillows can be sold at the split-off for $12 per unit, or they can be processed further into a deluxe pillow for additional processing costs of $8000 and sold for $16 for each deluxe pillow. If the pillows are processed further and made into deluxe pillows, the effect on operating income would be?

Explanation / Answer

the cost of making pillow at split-off=7000

And selling price of 2500 pillow =2500*12=$30000

So, earning per pillow=(30000-7000)/2500=$9.2

But if processed futher And produce deluxe pillow then

cost of making deluxe pillow=7000+8000=$15000

And selling price of 2500 deluxe pillow=2500*16=40000

So, earning per pillow=(40000-15000)/2500=$10

Hence , the effect of futher processing is increase the operating income.And it is beneficial for process futher.

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