XYZ Company makes two products, W and P, in a joint process. At the split-off po
ID: 2427559 • Letter: X
Question
XYZ Company makes two products, W and P, in a joint process. At the split-off point, 50,000 units of Product W and 60,000 units of Product P are available each month. Monthly joint production costs total $290,000 and are are allocated to the two products equally. Product W can either be sold at the split-off point for $5.60 per unit or it can be processed further and then sold for $8.80 per unit. If Product W is processed further, additional processing costs of $2.70 per unit will be incurred. Product P can also be sold either at the split-off point for $4.75 per unit or it can be processed further and then sold for $7.30 per unit. If Product P is processed further, additional processing costs of $3.10 per unit will be incurred. However, the further processing of Product P will result in a loss of 5,000 units (i.e., only 55,000 units of Product P will be available for sale if it is processed further). The further processing of Product W will not result in the loss of any units. Calculate what the selling price per unit of Product P needs to be at the split-off point in order for XYZ Company to be economically indifferent between selling Product P at the split-off point or processing Product P further and then selling it. Enter your answer with two places after the decimal point (i.e., $78.90).
Explanation / Answer
Incremental profit/(Loss):
= Incremental revenue-Incremental costs:
= ($7.30-$4.75)-$3.10
= ($0.55)
Hence, P should be sold only at split off point as further production decreasing firm profit.
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