Technical Chemical manufactures two products as part of a joint process: MB and

Question

         Technical Chemical manufactures two products as part of a joint process: MB and EB. Joint costs up to the split-off point total $70,000, and are allocated to each line of product in proportion to its relative sales value. At the split-off point, product MB can be sold for $85,000, and EB can be sold for $25,000. At an incremental cost of $30,000, MB can be processed into MB-2 and sold for $105,000. At an incremental cost of $25,000, EB can be processed into EB-2 and sold for $62,500.

a       Joint costs allocated to product MB total: $____________

b       Joint costs allocated to product EB total: $____________

c       The net change in operating income resulting from a decision to manufacture MB-2 is (specify whether the change is an increase or a decrease): $____________

d       The net change in operating income resulting from a decision to manufacture EB-2 is (specify whether the change is an increase or a decrease): $____________

e       The net change in operating income resulting from a decision to manufacture both MB-2 and EB-2 is (specify whether the change is an increase or a decrease): $____________

Explanation / Answer

Answer a & b Product MB EB Sale value at split off point $85,000 $25,000 Proportion 17 5 Allocation of Joint cost upto split off point of $70,000 in the ratio 17 : 5 $54,091 $15,909 Answer c Calculation of operating income if products are sold at split off point Product MB EB Total sale $85,000 $25,000 $1,10,000 Less : Cost allocated $54,091 $15,909 $70,000 Operating Income $30,909 $9,091 $40,000 Calculation of operating income if product MB-2 IS manufactured Product MB-2 EB Total sale $1,05,000 $25,000 $1,30,000 Less : Cost allocated $54,091 $15,909 $70,000 Less : Incremental cost $30,000 $0 $30,000 Operating Income $20,909 $9,091 $30,000 There is a decrease in operating income by = $40000 - $30000 = $10000 Answer d Calculation of operating income if product EB-2 IS manufactured Product MB EB-2 Total sale $85,000 $62,500 $1,47,500 Less : Cost allocated $54,091 $15,909 $70,000 Less : Incremental cost $25,000 $25,000 Operating Income $30,909 $21,591 $52,500 There is a increase in operating income by = $52500 - $40000 = $12500 Answer e Calculation of operating income if both product MB-2 & EB-2 are manufactured Product MB-2 EB-2 Total sale $1,05,000 $62,500 $1,67,500 Less : Cost allocated $54,091 $15,909 $70,000 Less : Incremental cost $30,000 $25,000 $55,000 Operating Income $20,909 $21,591 $42,500 There is a increase in operating income by = $42500 - $40000 = $2500

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