10.5 Decision Making - Sell As Is or Process Further Flashcards
(21 cards)
A corporation manufactures two products that are considered joint products. Common costs of $350,000, allocated using the physical measures method, yield 15,000 units of Product A and 20,000 units of Product B. Product B incurs $50,000 of direct costs and sells for $15 per unit. The corporation has the option of processing Product B further. This action would increase the product’s direct costs by $35,000 and would increase the unit selling price to $17. If the corporation further processes Product B, its income will
A. Decrease by $45,000.
B. Increase by $5,000
C. Increase by $55,000
D. Increase by $105,000
B. Increase by $5,000
The further processing will increase revenue by $2 per unit ($17 – $15). Therefore, total increased revenues are $40,000 ($2 per unit × 20,000 units). Since this exceeds the $35,000 costs of further processing by $5,000, the corporation’s income will increase by $5,000.
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.25, which maintains the same gross profit percentage.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1.50).
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?
A. The operating profit last month was $50,000, and the inventory value is $15,000.
B. The operating profit last month was $50,000, and the inventory value is $45,000.
C. The operating profit last month was $125,000, and the inventory value is $30,000.
D. The operating profit last month was $200,000, and the inventory value is $30,000.
B. The operating profit last month was $50,000, and the inventory value is $45,000.
Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 ÷ (60,000 units of AM-12 + 40,000 units of BM-36)]. The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost ÷ 60,000 units)]. Total inventory value is $45,000 (10,000 units × $4.50), and total operating profit is $50,000 [50,000 units sold × ($5.50 unit price – $4.50 unit cost)].
A company produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered:
Which of the following can be ignored?
A. Variable manufacturing costs of the upgrade process.
B. Avoidable fixed costs of the upgrade process.
C. Selling price per pound of X-547.
D. Joint manufacturing costs to produce X-547
D. Joint manufacturing costs to produce X-547
Common, or joint, costs cannot be identified with a particular joint product. By definition, joint products have common costs until the split-off point. Costs incurred after the split-off point are separable costs. The decision to continue processing beyond split-off is made separately for each product. The costs relevant to the decision are the separable costs because they can be avoided by selling at the split-off point. They should be compared with the incremental revenues from processing further. Thus, the joint manufacturing costs are the only irrelevant item and should be ignored in making the upgrade decision.
There is a market for both product X and product Y. Which of the following costs and revenues would be most relevant in deciding whether to sell product X or process it further to make product Y?
A. Total cost of making Y and the revenue from sale of Y.
B. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
C. Additional cost of making X, given the cost of making Y, and additional revenue from Y.
D. Total cost of making X and the revenue from sale of X and Y.
B. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
Incremental costs are the additional costs incurred for accepting one alternative rather than another. Questions involving incremental costing (sometimes called differential costing) decisions are based upon a variable costing analysis. The typical problem for which incremental cost analysis can be used involves two or more alternatives, for example, selling or processing further. Thus, the relevant costs and revenues are the marginal costs and marginal revenues.
A company produces ready-to-bake pie crusts. In deciding whether to process this product further into complete ready-to-bake pies by adding filling, relevant dollar amounts to consider would include all of the following except the
A. Cost to add the filling.
B. Selling price of the crusts.
C. Selling price of the complete pies.
D. Cost to manufacture the crusts.
D. Cost to manufacture the crusts.
Cost to manufacture the crusts is a joint cost incurred up to the point where a company decides whether to process further or not. In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk cost.
In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products after the split-off point should be viewed as
A. Sunk costs.
B. Differential costs.
C. Standard costs.
D. Relevant costs.
A. Sunk costs.
Joint costs incurred prior to the split-off point are not relevant to the decision whether or not to process further because they have already been incurred, i.e., they are sunk costs.
A circuit board company conducts a joint manufacturing process to produce 10,000 units of Board A and 10,000 units of Board B. The total joint variable manufacturing cost to produce these two products is $2,000,000. The company can sell all 10,000 units of Board B at the splitoff point for $300 per unit, or process Board B further and sell all 10,000 units at $375 per unit. The total additional cost to process Board B further would be $500,000, and all additional costs would be variable. If the company decides to process Board B further, what effect would the decision have on operating income?
A. $2,250,000 increase in operating income.
B. $250,000 increase in operating income.
C. $3,250,000 increase in operating income.
D. $750,000 decrease in operating income.
B. $250,000 increase in operating income.
If Board B is sold at the split-off point, the total revenue is $3,000,000 ($300 × 10,000 units). If Board B is processed further, the total revenues will be $3,750,000 ($375 × 10,000 units) and the increase in variable cost will be $500,000, resulting in a net figure of $3,250,000. The total joint variable manufacturing costs are irrelevant to the decision because they will be incurred regardless of whether B is sold at split-off or processed further. Therefore, if Board B is processed further, operating income will increase by $250,000 [($3,750,000 – $500,000) – $3,000,000].
A company uses a joint manufacturing process in the production of two products, Gummo and Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a cost of $20,000. Each batch of Gummo uses 60% of the Valdene and incurs $10,000 of separate costs. The resulting 3,000 pounds of Gummo sells for $10 per pound. The remaining Valdene is used in the production of Xylo, which incurs $12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for $12 per pound. The company uses the net realizable value method to allocate the joint material costs. The company is debating whether to process Xylo further into a new product, Zinten, which would incur an additional $4,000 in costs and sell for $15 per pound. If Zinten is produced, income would increase by
A. $26,000
B. $5,760
C. $14,000
D. $2,000
D. $2,000
If Xylo is processed further, the incremental sales revenue will be $6,000 [2,000 pounds × ($15 – $12)]. After subtracting the incremental costs, operating income will increase by $2,000 ($6,000 – $4,000).
A corporation produces two joint products, JP-1 and JP-2, and a single by-product, BP-1, in Department 2 of its manufacturing plant. JP-1 is subsequently transferred to Department 3, where it is refined into a more expensive, higher-priced product, JP-1R, and a by-product known as BP-2. Recently, a competitor introduced a product that would compete directly with JP-1R, and as a result, the corporation must re-evaluate its decision to process JP-1 further. The market for JP-1 will not be affected by the competitor’s product, and the corporation plans to continue production of JP-1, even if further processing is terminated. Should this latter action be necessary, Department 3 will be dismantled. Which of the following items should the corporation consider in its decision to continue or terminate Department 3 operations?
- The selling price per pound of JP-1.
- The total hourly direct labor cost in Department 3.
- Unit marketing and packaging costs for BP-2.
- Supervisory salaries of Department 3 personnel who will be transferred elsewhere in the plant, if processing is terminated.
- Department 2 joint cost allocated to JP-1 and transferred to Department 3.
- The cost of existing JP-1R inventory.
A. 2, 3, 5, 6
B. 2, 3, 4
C. 1, 2, 3
D. 1, 2, 3, 4, 5
C. 1, 2, 3
If further processing is ended, the selling price of JP-1 will be relevant instead of the price of JP-1R. The cost of direct labor in Department 3 is relevant because it will be saved if further processing is ended. Marketing and packaging costs for BP-2 are relevant because they will be saved if Department 3 is closed.
A corporation manufactures two products in a joint process incurring $150,000 of joint costs per batch that are allocated using the physical-measure method. Each batch yields 1,000 units of Product A and 4,000 units of Product B. Separable costs are $20,000 for Product A and $20,000 for Product B. Both products sell for $50 per unit. The corporation has the option of processing Product B further to produce 4,000 units of Product C, incurring additional costs of $8,000. The corporation should produce Product C if the selling price per unit is greater than
A. $52.00
B. $37.00
C. $57.00
D. $32.00
A. $52.00
The unit price of Product B is known to be $50.00. The additional unit cost of further processing is $2.00 ($8,000 ÷ 4,000 units). Consequently, the unit price must be at least $52.00 ($50.00 opportunity cost + $2.00).
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.
D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.25, which maintains the same gross profit percentage.
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1.50).
A firm manufactures several different products, including a premium lawn fertilizer and weed killer that is popular in hot, dry climates. The firm is currently operating at less than full capacity because of market saturation for lawn fertilizer. Sales and cost data for a 40-pound bag of lawn fertilizer is as follows.
Selling price $18.50
Production cost:
Materials and labor $12.25
Variable overhead 3.75
Allocated fixed overhead 4.00
= Income (loss) per bag $ (1.50)
On the basis of this information, which one of the following alternatives should be recommended to management?
A. Increase output and spread fixed overhead over a larger volume base.
B. Select a different cost driver to allocate its overhead.
C. Drop this product from its product line.
D. Continue to produce and market this product.
D. Continue to produce and market this product.
The relevant margin on this product is $2.50, not a loss of $(1.50). The fertilizer is covering all of its variable costs with some left over to cover fixed costs (the fixed costs that have been allocated are not traceable to this product).
A company produces three products (B-40, J-60, and H-102) from a single process. The company uses the physical volume method to allocate joint costs of $22,500 per batch to the products. Based on the following information, which product(s) should the company continue to process after the split-off point in order to maximize profit?
Physical units produced per batch
B-40: 1,500
J-60: 2,000
H-102: 3,200
Sales value per unit at split-off
B-40: $10.00
J-60: $4.00
H-102: $7.25
Cost per unit of further processing after split-off
B-40: 3.05
J-60: 1.00
H-102: 2.50
Sales value per unit after further processing
B-40: 12.25
J-60: 5.70
H-102: 9.75
A. J-60 only.
B. B-40 and H-102.
C. H-102 only.
D. B-40 only.
A. J-60 only.
The decision to sell-or-process-further is determined by whether the incremental revenue from further processing exceeds the incremental cost. Only J-60 produces an incremental profit.
Sales value after further processing
B-40: $12.25, J-60: $ 5.70, H-102: $ 9.75
Less: Sales value at split-off
B-40: (10.00), J-60: (4.00), H-102: (7.25)
Incremental revenue per unit
B-40: $ 2.25 , J-60: $1.70, H-102: $ 2.50
Less: Cost to process further
B-40: (3.05), J-60: (1.00), H-102: (2.50)
Incremental profit per unit
B-40: $ (0.80), J-60: $ 0.70, H-102: $ 0.00
A lumber company produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:
Green lumber
Sales Value at Split-off: $159,600
Additional Variable Costs: $24,000
Sales Value after Further Processing: $178,000
Rough lumber
Sales Value at Split-off: 124,000
Additional Variable Costs: 28,200
Sales Value after Further Processing: 173,600
Sawdust
Sales Value at Split-off: 102,000
Additional Variable Costs: 19,600
Sales Value after Further Processing: 130,000
Which products should be processed further?
A. Green lumber and sawdust only.
B. Rough lumber and sawdust only.
C. Green lumber and rough lumber only.
D. All three products.
B. Rough lumber and sawdust only.
Joint products should only be processed further if the incremental revenues exceed the incremental costs. For green lumber, the incremental revenue is only $18,400 ($178,000 – $159,600), which is less than the incremental costs of $24,000. For rough lumber, the incremental revenue of $49,600 ($173,600 – $124,000) exceeds the incremental costs of $28,200. For sawdust, the incremental revenue of $28,000 (130,000 – $102,000) exceeds the incremental costs of $19,600. Thus, only rough lumber and sawdust should be processed further.
A firm manufactures three products: A, B, and C. During the month of May, the firm’s production, costs, and sales data were as follows:
Products
Units of production
A: 30,000
B: 20,000
C: 70,000
Further processing costs
A: $ –
B: $60,000
C: $140,000
Unit sales price:
At split-off
A: 3.75
B: 5.50
C: 10.25
After further processing
A: –
B: 8.00
C: 12.50
Joint production costs to the split-off point will total $480,000. Based on the above information, which one of the following alternatives should be recommended to the firm’s management?
A. Sell both Product B and Product C at the split-off point.
B. Process both Products B and C further.
C. Process Product B further but sell Product C at the split-off point.
D. Process Product C further but sell Product B at the split-off point.
D. Process Product C further but sell Product B at the split-off point.
Sales revenues for B and C at split-off respectively are $110,000 (20,000 × $5.50) and $717,500 (70,000 × $10.25). Revenues following further processing can be calculated as follows:
B
Sales price after further processing: $8
x) Units 20,000
= Gross Revenue: $160,000
-) Less: Processing costs (60,000)
= Total Revenue: $100,000
C
Sales price after further processing: $12.50
x) Units 70.000
= Gross Revenue: $875,000
-) Less: Processing costs (140,000)
= Total Revenue: $735,000
Thus, the combination generating the most revenue is to sell B at split-off ($110,000 > $100,000) and process C further ($735,000 > $717,500).
A company uses a joint process that yields two products, X and Y. Each product can be sold at its split-off point or processed further. All the additional processing costs are variable and can be traced to each product. Joint production costs are $35,000. Other sales and cost data are as follows.
Sales value at split-off point
Product X: $60,000
Product Y: $35,000
Final sales value if processed further
Product X: 80,000
Product Y: 50,000
Additional costs beyond split-off
Product X: 14,000
Product Y: 18,000
Management wants to know whether to sell each product at the split-off point or to process the products further. Which one of the following options should be recommended to management?
A. Process both products further.
B. Sell both products at the split-off point.
C. Sell Product X at split-off and process Product Y further.
D. Process Product X further and sell Product Y at split-off.
D. Process Product X further and sell Product Y at split-off.
This question requires evaluating whether the profit would be higher to sell at the split-off point or to process further:
Product X
Final sales value $ 80,000
Split-off sales value (60,000)
Marginal revenue 20,000
Marginal cost 14,000
= $6,000
Product Y
Final sales value $ 50,000
Split-off sales value (35,000)
Marginal revenue 15,000
Marginal cost 18,000
= $(3,000)
The profit is higher for Product X after further processing and higher for Y at the split-off point. Accordingly, the company should process Product X further and sell Product Y at the split-off point.
A firm manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a joint production process, incurring $250,000 of joint costs. The firm allocates joint costs based on the physical volume of each product produced. Mononate and Beracyl can each be sold at the split-off point in a semifinished state or, alternatively, processed further. Additional data about the two products are as follows:
Sales price per gallon at split-off
Mononate $7
Beracyl $15
Sales price per gallon if processed further
Mononate $10
Beracyl $18
Variable production costs if processed further
Mononate $125,000
Beracyl $115,000
An assistant in the firm’s cost accounting department was overheard saying “….that when both joint and separable costs are considered, the firm has no business processing either product beyond the split-off point. The extra revenue is simply not worth the effort.” Which of the following strategies should be recommended for the firm?
A. Process Mononate further and sell Beracyl at split-off.
B. Sell both Mononate and Beracyl at split-off.
C. Sell Mononate at split-off and process Beracyl further.
D. Process both Mononate and Beracyl further.
C. Sell Mononate at split-off and process Beracyl further.
To determine whether a product is worth processing further, its contribution margin after processing must be calculated. The firm performs these calculations as shown below. Note that joint costs are sunk and thus not relevant to the decision whether to process further.
Mononate
Incremental sales dollars $3
x) Times: Units 40,000
= Incremental revenue $120,000
-) Minus: Variable costs (125,000)
= Change in operating income $(5,000)
Beracyl
Incremental sales dollars $3
x) Times: Units 60,000
= Incremental revenue $180,000
-) Minus: Variable costs (115,000)
= Change in operating income $65,000
Mononate will generate a loss if it is processed further and should therefore be sold at split-off. Beracyl, however, will generate an additional contribution and will thus benefit from being processed further.
A company uses a joint process to produce three products: A, B and C, all derived from one input. The company can sell these products at the point of split-off or process them further. The joint production costs during October were $10,000. The company allocates joint costs to the products in proportion to the relative physical volume of output. Additional information is presented below:
Product A
Units produced: 1,000
Unit sales price at split-off: $4.00
Unit sales price if processed further: $5.00
Unit additional cost: $0.75
Product B
Units produced: 2,000
Unit sales price at split-off: 2.25
Unit sales price if processed further: 4.00
Unit additional cost: 1.20
Product C
Units produced: 1,500
Unit sales price at split-off: 3.00
Unit sales price if processed further: 3.75
Unit additional cost: 0.90
Assuming sufficient demand exists, to maximize profits, the company should sell
A. Products A, B, and C at split-off.
B. Product C at split-off and perform additional processing on products A and B.
C. Product A at split-off and perform additional processing on products B and C.
D. Product B at split-off and perform additional processing on products C and A.
B. Product C at split-off and perform additional processing on products A and B.
The products should be processed further if the incremental revenue exceeds the incremental cost. The incremental revenue of A is $1.00 which exceeds its incremental cost ($0.75). The incremental revenue of B is $1.75 which exceeds its incremental cost ($1.20). The incremental revenue of C is $0.75 which is lower than its incremental cost ($0.90). Therefore, product C should be sold at split-off and product A and B should be process further.
N-Air Corporation uses a joint process to produce three products: A, B, and C, all derived from one input. The company can sell these products at the point of split-off (end of the joint process) or process them further. The joint production costs during October were $10,000. N-Air allocates joint costs to the products in proportion to the relative physical volume of output. Additional information is presented in the opposite column.
Product A
Units produced: 1,000
Unit sales price at split-off: $4.00
Unit sales price if processed further: $5.00
Unit additional cost if processed further: $.75
Product B
Units produced: 2,000
Unit sales price at split-off: 2.25
Unit sales price if processed further: 4.00
Unit additional cost if processed further: 1.20
Product C
Units produced: 1,500
Unit sales price at split-off: 3.00
Unit sales price if processed further: 3.75
Unit additional cost if processed further: .90
Assuming sufficient demand exists, N-Air could sell all the products at the prices previously mentioned at either the split-off point or after further processing. To maximize its profits, N-Air Corporation should
A. Sell products A, B, and C at split-off.
B. Sell product A at split-off and perform additional processing on products B and C.
C. Sell product B at split-off and perform additional processing on products C and A.
D. Sell product C at split-off and perform additional processing on products A and B.
D. Sell product C at split-off and perform additional processing on products A and B.
To maximize profits, it must be determined whether each product’s incremental revenues will exceed its incremental costs. Joint costs are irrelevant because they are sunk costs.
A
Unit sales price if processed further $5.00
Minus: Unit sales price at split-off (4.00)
= Incremental revenue per unit $1.00
Minus: Incremental unit cost (.75)
= Excess unit revenue over unit cost $ .25
B
Unit sales price if processed further $4.00
Minus: Unit sales price at split-off (2.25)
= Incremental revenue per unit $1.75
Minus: Incremental unit cost (1.20)
= Excess unit revenue over unit cost $ .55
C
Unit sales price if processed further $3.75
Minus: Unit sales price at split-off (3.00)
= Incremental revenue per unit $.75
Minus: Incremental unit cost (.90)
= Excess unit revenue over unit cost $ (.15)
It is most profitable for N-Air to process products A and B further and to sell product C at the split-off point.
In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold to maximize profits?
A. Joint costs to the split-off point.
B. Purchase costs of the materials required for the joint products.
C. Separable costs after the split-off point.
D. Sales salaries for the period when the units were produced.
C. Separable costs after the split-off point.
Joint products are created from processing a common input. Joint costs are incurred prior to the split-off point and cannot be identified with a particular joint product. As a result, joint costs are irrelevant to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if incremental revenues exceed the separable costs, products should be processed further, not sold at the split-off point.
