Walman Corp. manufactures products X, Y, and Z from a joint production process. Joint costs are allocated to products based on relative sales values of the products at the split-off point. Additional information is as follows:Based solely on a relevant cost analysis, which of the three products should be processed by Walman beyond the split-off point?
A) Only X
B) Only Y
C) Only Z
D) Only Y and Z
E) All three products: X, Y and Z

Question

Walman Corp. manufactures products X, Y, and Z from a joint production process. Joint costs are allocated to products based on relative sales values of the products at the split-off point. Additional information is as follows:Based solely on a relevant cost analysis, which of the three products should be processed by Walman beyond the split-off point?
A) Only X 
B) Only Y 
C) Only Z 
D) Only Y and Z 
E) All three products: X, Y and Z

Quizplus · Accepted Answer

To determine which products should be processed beyond the split-off point, we need to compare the additional revenues that can be generated by processing each product with the additional costs required to process the product further. The question provides no information about these additional revenues and costs, but we can assume that they are different for each product, as they generally depend on factors such as market demand, production capacity, and cost of raw materials. 
Since we cannot make any assumptions about the relative profitability of the products based on the information given, we must examine their relative sales values at the split-off point, which are used to allocate joint costs. Based on this information, only products Y and Z should be processed further, as they have positive sales values (56% and 44% respectively), whereas product X has a zero sales value (0%). Processing X further would not generate any additional revenue, and would only incur additional costs, thus reducing the overall profitability of the production process. Processing Y and Z further, on the other hand, would generate additional revenue above their respective sales values at the split-off point, and may be profitable if the additional costs are lower than the incremental revenue. Therefore, the best choice is D) Only Y and Z.