Dorsey Company manufactures three products from a common input in a joint proces
ID: 2528112 • Letter: D
Question
Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $92,000 per quarter. 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 $ 3 per pound $ 4 per pound $ 13 per gallon Quarterly Output 18,000 pounds 23,000 pounds 5,000 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 $ 43,000 $ 38,000 $ 17,750 Selling Price $ 4 per pound $ 7 per pound $ 17 per gallon Required: a. Compute the incremental profit (loss) for each product. Product A Product B Product C Selling price after further processing Selling price at the split-off point Incremental revenue per pound or gallon Total quarterly output in pounds or gallons Total incremental revenue Total incremental processing costs Total incremental profit or lossExplanation / Answer
Solution A: Profit/ Loss for Each product
Additional Processing Analysis
A
B
C
Total
Selling Price per unit
4
7
17
Selling Price before Processing
3
4
13
Increase in Selling Price due to processing
1
3
4
No. of units
18,000
23,000
5,000
Additional Sale revenue
18,000
69,000
20,000
107,000
Less: Additional Processing cost
43,000
38,000
17,750
98,750
Advantage / (Disadvantage) from processing
-25,000
31,000
2,250
8,250
Working Note:
Solution 2: Product A
Let’s prepare the Income statement till Split off point:
Income Statement before Split off
A
B
C
Total
Selling Price before Processing
3
4
13
No. of units
18,000
23,000
5,000
Revenue
54,000
92,000
65,000
211,000
Less: Joint Product cost allocation
23545.02
40,113.74
28,341.23
92,000
Advantage / (Disadvantage) before processing
30,454.98
51,886.26
36,658.77
119,000.00
Product A should be sold at split-off point, since as per Solution A, Additional processing cost does not increase the sales price significantly which turns Product A in negative income.
Working Note:
Particulars
Total Expense
Basis of Allocation
Total Allocation units
Ratio of Allocation
A
B
C
Joint Processing cost
92,000
Sale revenue at split off
211
54:92:65
23545.02
40113.74
28341.23
Total
92,000
23545.02
40113.74
28341.23
Sale revenue at Split off point
A
B
C
Total
Selling Price per unit
10
4
16
No. of units
11,000
17,300
2,200
Sale revenue
110,000
69,200
35,200
214,400
Solution- C:
Products B and C should be processed further since Dorsey Company will derive extra income from processing as shown in solution 1.
Additional Processing Analysis
A
B
C
Total
Selling Price per unit
4
7
17
Selling Price before Processing
3
4
13
Increase in Selling Price due to processing
1
3
4
No. of units
18,000
23,000
5,000
Additional Sale revenue
18,000
69,000
20,000
107,000
Less: Additional Processing cost
43,000
38,000
17,750
98,750
Advantage / (Disadvantage) from processing
-25,000
31,000
2,250
8,250
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