Company has a joint process, which produces three products called A, B and C. Ea

Question

Company has a joint process, which produces three products called A, B and C. Each product may

be sold at split-off or processed further and then sold. Joint processing costs for a year are $20,000. Other relevant data are:   

Product Sales Value at split-off Separable Processing Costs After Split-Off Sales Value atCompletion   

A $94,000 $28,000 $115,000   

B 60,000 10,000 82,000   

C 66,000 14,000    79,000   

A) Which products should be processed further? Why?

B) If the Sealy Company maximizes profits, what is the operating income?

Explanation / Answer

A. Product B should be processed further . Because sales value after split will be more than sales value at split off even after deducting separation cost..

For example;

sales value at completion= 82000

Less: separation cost= -(10000)

sales value after deduction of cost = 72000 which is still more than sales value at split off i.e. 60000

So, product B should be processed further but in rest two product after deducting separation cost the sales value at completion becomes less than sales value at split off.

Proof:

Product A

Sales value at completion= 115000

Less:separation cost = 28000

Sales value after completion = 87000which is less than sales value at split off i.e. 94000

Product C

Sales value at completion =79000

Less:separation cost = 14000

Sales value after completion = 65000which is less than sales value at split off i.e. 66000

B. If sealy company maximises profit then product A and c should be sold at split off and product B after processing further.

So , Sales value= (94000+82000+66000)

Less: Joint processing cost = -20000

Less : product B exp.= -10000

Operating income= (94000+72000+66000)-20000-10000

= $212000

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