XYZ Company makes two products, W and P, in a joint process. At the split-off point, 50,000 units of Product W and 60,000 units of Product P are available each month. Monthly joint production costs total $290,000 and are are allocated to the two products equally. Product W can either be sold at the split-off point for $5.60 per unit or it can be processed further and then sold for $8.80 per unit. If Product W is processed further, additional processing costs of $2.70 per unit will be incurred. Product P can also be sold either at the split-off point for $4.75 per unit or it can be processed further and then sold for $7.30 per unit. If Product P is processed further, additional processing costs of $3.10 per unit will be incurred. However, the further processing of Product P will result in a loss of 5,000 units (i.e., only 55,000 units of Product P will be available for sale if it is processed further). The further processing of Product W will not result in the loss of any units. Calculate what the selling price per unit of Product P needs to be at the split-off point in order for XYZ Company to be economically indifferent between selling Product P at the split-off point or processing Product P further and then selling it. Enter your answer with two places after the decimal point (i.e., $78.90).
Selling or Processing Materials Further:
The relevant information to take into account when faced with a selling-or-processing-materials-further decision is the incremental processing costs and the incremental sales revenue. Sunk costs like the processing cost up to the decision-making point are never relevant.
Answer and Explanation: 1
We are looking for the point where the selling price at the split-off point is the same as the final selling price less the cost of processing...
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fromChapter 9 / Lesson 10
Balancing costs in relation to selling or processing materials further will depend on how the other aspects of production are performing. Learn more about whether to sell or process materials further, considering relevant costs, making a decision and relevant examples.