A company manufacturers two cereal as part of a jointprodcution process: regular

Question

A company manufacturers two cereal as part of a jointprodcution process: regular and high fiber. Joint costs up tothe split-off point total $85,000 per batch. These costs areallocated to regular and high fiber in proportion to their relativesales values at the split-off point of $40,000 for the regular and$60,000 for the high fiber. Both lines of cereal can befurther processed into granola. the folowing table summarizes thecosts and revenue associated with additional processing of regularand high fiber:                                                 Additonal processingcost          Final selling price of granola regular                                           $18,000                                    $67,000 highfiber                                           38,000                                      97,000 a. Allocate the $85,000 in joint costs to the regular and thehigh fiber. b. Which product would result in a net decrease in operatingincome if processed into granola? c. Which product would result in a net increase in operatingincome if processed into granola?                             A company manufacturers two cereal as part of a jointprodcution process: regular and high fiber. Joint costs up tothe split-off point total $85,000 per batch. These costs areallocated to regular and high fiber in proportion to their relativesales values at the split-off point of $40,000 for the regular and$60,000 for the high fiber. Both lines of cereal can befurther processed into granola. the folowing table summarizes thecosts and revenue associated with additional processing of regularand high fiber:                                                 Additonal processingcost          Final selling price of granola regular                                           $18,000                                    $67,000 highfiber                                           38,000                                      97,000 a. Allocate the $85,000 in joint costs to the regular and thehigh fiber. b. Which product would result in a net decrease in operatingincome if processed into granola? c. Which product would result in a net increase in operatingincome if processed into granola?                            

Explanation / Answer

a. Allocate the $85,000 in joint costs to the regular and thehigh fiber         Regular Fibre     $85,000x $40,000 /$100,000   =   $34,000       HighFibre         $85,000x $60,000 /$100,000   =   $51,000 b. Which product would result in a net decrease in operatingincome if processed into granola?                                                                   AtSplittoff                  FurtherProcessing                                              Regular      High               Regular         High Sales                                      $40,000    $60,000              $67,000        $97,000 Less : Cost atSplit-off            $34,000     $51,000              $34,000        $51,000 Income at Splitoff                  $ 6,000     $9,000              $33,000       $46,000 AdditionalCost                                                                 $18,000        $38,000 Income afterSplit-off                                                   $15,000        $8,0000
   High fibre if processed further would result intodecrease in operating income by $1,000 c. Which product would result in a net increase in operatingincome if processed into granola? c. Which product would result in a net increase in operatingincome if processed into granola? Regular fibre would result innet increase in operating income by $9,000, if processedfurther.

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