Dock Corporation makes two products from a common input. Joint processing costs up to the split-off point total $33,600 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 financial advantage (disadvantage) for the company of processing Product X beyond the split-off point?
A) ($3,500)
B) $27,700
C) $20,500
D) $3,700

Question

Dock Corporation makes two products from a common input. Joint processing costs up to the split-off point total $33,600 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 financial advantage (disadvantage) for the company of processing Product X beyond the split-off point?
A) ($3,500) 
B) $27,700 
C) $20,500 
D) $3,700

Quizplus · Accepted Answer

The financial advantage (disadvantage) of processing Product X beyond the split-off point can be calculated by comparing the additional revenue earned from further processing with the additional costs incurred. Based on the given data, the additional revenue from further processing Product X is $32,000, which is calculated as follows:

Revenue from sales at split-off point = $40,000 × (100% - 70%) = $12,000 
Additional revenue from further processing Product X = $44,000 - $12,000 = $32,000

The additional costs of further processing Product X are $35,500, which are calculated as follows:

Direct materials = $10,000 
Direct labor = $15,000 
Variable overhead = $3,500 
Allocated joint costs = $7,000 + $500 × ($44,000 ÷ $64,000) = $35,500

Therefore, the financial advantage (disadvantage) of processing Product X beyond the split-off point is:

Additional revenue from further processing Product X ($32,000) - Additional costs of further processing Product X ($35,500) = ($3,500)

Since the result is negative, it means that processing Product X beyond the split-off point would result in a financial disadvantage for the company, and therefore the best choice would be to sell the product at the split-off point.

Dock Corporation Makes Two Products from a Common Input