The Edgerton Co Procdecse products A, B, and C from a joint process. The join costs for 2014 were...

Question:

The Edgerton Co Procdecse products A, B, and C from a joint process. The join costs for 2014 were $85,000. All three products can be processed further and the pertinent information follows:

Item Units Produced Sales Value at Split Off Sales Value if Processed Further Added Cost to Process Further
A 5,000 $29,000 $47,000 $11,500
B 3,000 48,000 55,000 9,000
C 1,500 24,000 32,000 12,000

a) To maximize profits, which product(s) should be processed further?

b) If C is to be processed further, what should its price be to break even?

Joint costing and by-product costing

A joint cost is a type of cost that can benefit or produce one or more products. While a by-product cost is the smallest production cost, and therefore can only produce minor sales and revenue to the company. The costing occurs when the final products are split off into parts or units.

Answer and Explanation:

To determine the product that should be processed further, the difference between the incremental revenue (sales value at split-off - sales value if processed further) and added costs will be computed.

Product Incremental Revenue Added costs Difference Should be processed further?
A 18,000 11,500 6,500 Yes
B 7,000 9,000 (2,000) No
C 8,000 12,000 (4,000) No

Based on the above table, Product A should be processed further to achieve maximum profit.

2. If Product C should be processed further, the break-even is as follows:

Break-even = Sales value at split off + Added costs to process further

Break-even = 24,000 + 12,000

Break-even = $36,000

In units, the selling price should be at $24 per unit ($36,000 / 1,500 units)


Learn more about this topic:

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Product Costs in Accounting: Definition & Examples

from Financial Accounting: Tutoring Solution

Chapter 2 / Lesson 13
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