P7.57B Prepare an incremental analysis for the decision whether to sell or proce
ID: 2411542 • Letter: P
Question
P7.57B
Prepare an incremental analysis for the decision whether to sell or process materials further.
14(LO 4) The following information is for a company that produces four types of microprocessors using the same production process. The common costs of these products, up to the split-off point, are $550,000. Common costs are allocated based on the quantity of output. The following information includes additional processing costs, the selling price of each product at the split-off point, and the selling price of each product after further processing:
Microprocessor
Number of
Units Produced
Selling Price at
Split-Off Point
Selling Price after
Further Processing
Additional Costs for
Further Processing
1
3,000
$10.00
$15.00
$14,800
2
4,000
9.50
12.25
8,500
3
2,500
11.00
15.70
12,000
4
500
7.75
10.25
1,250
Instructions
a.
Assuming only one product can be processed further, determine which one the company should choose. Briefly explain why.
Product 2
b.
Referring to your answer in part (a), identify which information is relevant to the decision to process this product further.
c.
If common costs up to the split-off point were allocated on the basis of the market values at the split-off point, would your decision in part (a) be different? Briefly explain why.
Microprocessor
Number of
Units Produced
Selling Price at
Split-Off Point
Selling Price after
Further Processing
Additional Costs for
Further Processing
1
3,000
$10.00
$15.00
$14,800
2
4,000
9.50
12.25
8,500
3
2,500
11.00
15.70
12,000
4
500
7.75
10.25
1,250
Explanation / Answer
M1 M2 M3 M4 Incremental revenue Sales after further processing 45000 49000 39250 5125 Ssale at split off 30000 38000 27500 3875 Incremental revenue 15000 11000 11750 1250 Less: Further processing cost 14800 8500 12000 1250 Incremental income 200 2500 -250 0 Req a: Microprocessor 2 shall be processed further Req b: Relevant for decision making: Sales after processing further Sales at split off Further processing cost Units produced Req c: No allocation of Joint cost will not make any difference. As it is sunk cost, hence irrelevant for decision
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