Hamilton, Inc. produces three products using a joint process which provides for $350,000 in joint costs. The products X, Y and Z can be sold at split-off or processed further and then sold. The production level for each product is 5,000 units. The following unit information is also available:

-Product Y
A) should be processed further as this will increase profits by $30,000.
B) should be sold at split-off to maximize profits.
C) should be processed further to increase profits by $14 per unit.
D) can be processed further or sold at split-off, it makes no difference.

Question

Hamilton, Inc. produces three products using a joint process which provides for $350,000 in joint costs. The products X, Y and Z can be sold at split-off or processed further and then sold. The production level for each product is 5,000 units. The following unit information is also available:
 
-Product Y
A) should be processed further as this will increase profits by $30,000. 
B) should be sold at split-off to maximize profits. 
C) should be processed further to increase profits by $14 per unit. 
D) can be processed further or sold at split-off, it makes no difference.

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the incremental profit for each product if it is processed further:
- Product X:
   - Incremental revenue: $40 per unit
   - Incremental cost: $20 per unit
   - Incremental profit: $20 per unit
   - Incremental profit for 5,000 units: $100,000
- Product Y:
   - Incremental revenue: $60 per unit
   - Incremental cost: $35 per unit
   - Incremental profit: $25 per unit
   - Incremental profit for 5,000 units: $125,000
- Product Z:
   - Incremental revenue: $15 per unit
   - Incremental cost: $10 per unit
   - Incremental profit: $5 per unit
   - Incremental profit for 5,000 units: $25,000

Therefore, the best choice is to process Product Y further, as it has the highest incremental profit of $25 per unit or $125,000 for 5,000 units. This will increase the total profit by $30,000 compared to selling at split-off.