The Freshfield Company manufactures a number of products from the same raw mater

Question

The Freshfield Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product A could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $31,000. Freshfields Company should:
Answer


further process product A because its incremental revenues will exceed incremental costs by $4,000.

further process product A because its incremental revenues will exceed incremental costs by $14,000.

sell product A at the split-off point because its incremental costs will exceed incremental revenues by $1,000.

sell product A at the split-off point because its incremental costs will exceed incremental revenues by $4,000.

Explanation / Answer

Answer Cut-off point income = $18,000 – 10,000 = $8,000 Further processing will cost = 10,000 + 9,000 = 19,000 Revenue after processing = $31,000 Income after processing = 31,000 – 19,000 = $12,000 Increase in profit = $12,000 – 8,000 = $4,000 further process product A because its incremental revenues will exceed incremental costs by $4,000.

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