SELL OR PROCESS FURTHER, BASIC ANALYSIS Shenista Inc. produces four products (Al
ID: 2552449 • Letter: S
Question
SELL OR PROCESS FURTHER, BASIC ANALYSIS
Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow:
Direct materials $95,000
Direct labour 43,000
Overhead 85,000
The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.
Management is considering processing Delta beyond the split-off point, Which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labour also needed, will cost $8,500 per quarter.
Required:
1. What is the operating profit earned by the four products for one quarter?
2. Should the division process Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?
Explanation / Answer
SOLUTION
(A) Total sales = $100,000 + $93,000 + $30,000 + $40,000 = $263,000
Costs = $95,000 + $43,000 + $85,000 = $223,000
Calculation of operating profit-
(B)
The company should process Delta further because gross profit would increase by $11,100 if it were processed further.
Note: Joint costs are irrelevant to this decision because the company will incur them whether or not Delta is processed further.
Amount ($) Sales (A) 263,000 Costs (B) 223,000 Operating profit (A-B) 40,000Related Questions
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