laukea Company makes two products from a common input. Joint processing costs up
ID: 2483427 • Letter: L
Question
laukea Company makes two products from a common input. Joint processing costs up to the split-off point total $50,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below: What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off pointExplanation / Answer
a)
Incremental revenue from further processing = $47400 - $24150 = $23250
Incremental cost of further processing = $24000
Net disadvantage from further processing of X
= Incremetal cost - incremental revenue
= $24000 - $ 23250
= $750
Profit will reduce by $750
b)
Incremental revenue from further processing = $57900 - $38150 = $ 19750
Incremental cost of further processing = $ 18300
Net advantage from further processing of Y
= incremental revenue - Incremetal cost
= $ 19750 - $ 18300
= $ 1450
profit will increase by $1450
c)
If the company goes for further processing, the profit that could be earned by the company
= 47400 - (19500 + 24000)
= $3900
so if the company sales X at the split off point, the minimum acceptable price of the company
= allocated joint cost + the profit that could be earned if the company goes for further processing
= $19500 + $3900
= $23400
d)
If the company does not process the product there will be a loss of additional contribution of $1450 (as calculated in 2).
The minimum acceptable price of the company at the split off point
= 38150 + 1450
= $39600
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