Payne Company makes two products, M and N, in a joint process. At the split-off point, 40,000 units of M and 50,000 units of N are available each month. Monthly joint production costs are $270,000.
Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit. If N is processed further, additional processing costs of $2.50 per unit will be incurred.
-What would the selling price per unit of product N need to be after further processing in order for Payne Company to be economically indifferent between selling N at the split-off point or processing N further?
A)$8.70
B)$6.70
C)$7.20
D)$5.70

Question

Payne Company makes two products, M and N, in a joint process. At the split-off point, 40,000 units of M and 50,000 units of N are available each month. Monthly joint production costs are $270,000.
Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit. If N is processed further, additional processing costs of $2.50 per unit will be incurred. 
-What would the selling price per unit of product N need to be after further processing in order for Payne Company to be economically indifferent between selling N at the split-off point or processing N further?
A)$8.70
B)$6.70
C)$7.20
D)$5.70

Quizplus · Accepted Answer

Profit from further processing
The company would be indifferent between selling Product N at the split-off point or processing Product N further when the sales value at the split-off point equals the incremental profit that the company could earn by processing further.
Sales value at split-off point = Final sales value after further processing - Cost of further processing
$3.20 = Final sales value after further processing - $2.50
Final sales value after further processing = $3.20 + $2.50 = $5.70

Payne Company Makes Two Products, M and N, in a Joint