Stahl Inc. produces three separate products from a common process costing $100,918. Each of the...

Question:

Stahl Inc. produces three separate products from a common process costing $100,918. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below are cost and selling price data for a recent period.

Sales Value at Split-Off Point Cost to Process Further Sales Value after Further Processing
Product 10 $59,105 $100,393 $189,550
Product 12 15,027 30,524 35,314
Product 14 55,680 150,231 214,788

a. Determine total net income if all products are sold at the split-off point.

b. Determine total net income if all products are sold after further processing.

c. Calculate incremental profit/(loss) and determine which products should be sold at the split-off point and which should be processed further.

d. Determine total net income using the results from previous part.

e. Is the net income different from that determined in part (b)?

Sell or Process Further Decisions:

With certain products, management is confronted with what we call "sell or process further decisions." These decisions describe situations in which a product may be sold at a split-off point or may be processed further and sold later. While the additional processing carries a cost, this processing may also result in additional net income if the increased selling price outweighs the processing costs. To determine whether a product should be sold at the split-off point or processed further, management constructs an incremental analysis. This analysis demonstrates the true costs/benefits related to a decision.

Answer and Explanation:


Question A:

a. Determine total net income if all products are sold at the split-off point.

Sales Value at Split-Off Point
Product 10 $59,105
Product 12 15,027
Product 14 55,680
Total Sales Value = $129,812
Less: Common Process Costing (100,918)
Total Net Income at Split-Off Point = $28,894


Question B:

b. Determine total net income if all products are sold after further processing.

Cost to Process Further Sales Value after Further Processing
Product 10 $100,393 $189,550
Product 12 30,524 35,314
Product 14 150,231 214,788
Total = $281,148 = $439,652
Less: Common Process Costing (100,918)
Less: Total Cost to Process Further (281,148)
Total Net Income After Further Processing = $57,586


Question C:

c. Calculate incremental profit/(loss) and determine which products should be sold at the split-off point and which should be processed further.

Sales Value after Further Processing - Sales Value at Split-Off Point = Incremental Revenues - Cost to Process Further Incremental Profit/(Loss)
Product 10 $189,550 - $59,105 = $130,445 - $100,393 = $30,052
Product 12 35,314 - 15,027 = 20,287 - 30,524 = (10,237)
Product 14 214,788 - 55,680 = 159,108 - 150,231 = 8,877

We find that Product 10 and Product 14 should be sold after further processing while Product 12 should be sold at the split-off point.


Question D:

d. Determine total net income using the results from previous part.

Product 12 (Sales Value at Split-Off Point) $15,027
Product 10 (Sales Value After Further Processing) 189,550
Product 14 (Sales Value After Further Processing) 214,788
Total Sales Value $419,365
Common Process Costing (100,918)
Product 10 (Cost to Process Further) ($100,393)
Product 14 (Cost to Process Further) (150,231)
Total Costs (351,542)
Total Net Income = $67,823


Question E:

e. Is the net income different from that determined in part (b)?

Net income in part (d) is greater than the income found in part (b). This is because in part (d) we calculated net income without processing Product 12 further which resulted in cost savings.


Learn more about this topic:

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Incremental Analysis: Definition & Examples

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 7
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