Differential Analysis: The Key to Decision Making EXERCISE 12-13 Sell or Process

Question

Differential Analysis: The Key to Decision Making EXERCISE 12-13 Sell or Process Further [L012-7] Wexpro. Inc.. produces several products from processing 1 ton of clypton. a rare mineral. Material and processing costs total dollar60,000 per ton. one-fourth of which is allocated to product XI5. Seven thousand units of product XI5 are produced from each ton of clypton. The units can either be sold at the split-off point for dollar9 each, or processed further at a total cost of dollar9,500 and then sold for dollar12 each. Required: Should product X15 be processed further or sold at the split-off point?

Explanation / Answer

Solution:

Material and processing cost = $60,000 per ton

Allocated Material and processing cost to Product X15 = $60,000 x ¼ = $15,000 per ton

X15 Produced Units from 1 ton = 7,000 Units

Sale Price per unit of X15 at split off point = $9 each

Sale Price Per Unit of X15 after further processing = $12

In order to find out that the product x15 should be further processed or not, we need to calculate profit in both situation and take decision on the basis of higher profit:

Calculation of Profit at split off point and further processing:

If Product X15 Sold at Split off point

Sale Value (7,000 Units x $9)

$63,000

Less: Allocated Cost of material and processing ($60,000 x ¼)

($15,000)

Profit

$48,000

If Product X15 sold after further processing

Sale Value (7,000 Units x $12)

$84,000

Less: Allocated Cost of material and processing ($60,000 x ¼)

($15,000)

Less: Additional cost of further processing

($9,500)

Profit

$59,500

From the above calculation, it is clear that the profit from Product X15 is higher if it is sold after further processing.

Hence, the Product X15 should be sold after further processing.

If Product X15 Sold at Split off point

Sale Value (7,000 Units x $9)

$63,000

Less: Allocated Cost of material and processing ($60,000 x ¼)

($15,000)

Profit

$48,000

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