Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be:
A) sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B) processed further, since this will increase profits by $2,500 each period.
C) sold at the split-off point, since further processing will result in a loss of $2,500 each period.
D) processed further, since this will increase profits by $12,500 each perioD.

Question

Quizplus · Accepted Answer

If product A is sold at the split-off point for $2 per unit, the total revenue will be: 5,000 units x $2 = $10,000.

If product A is processed further at a cost of $12,500 and then sold for $5 per unit, the total revenue will be: 5,000 units x $5 = $25,000.

The total cost for producing 5,000 units of product A and processing it further will be: $90,000 + $12,500 = $102,500.

Therefore, the profit from processing product A further will be: $25,000 - $102,500 = -$77,500.

Since processing product A further will result in a loss of $77,500, it is best to sell it at the split-off point for $2 per unit. However, products B and C may still be processed further if it results in a profit.

Products A, B, and C Are Produced from a Single