Download Discussion Question

Discussion Question
What determines whether a product should be sold at the point of separation from a joint process or after
further processing? (Assume that a decision is to be based solely on quantitative information.)
EXERCISE 8-1
Joint Costs and Further Processing
Pure Paint Company has been known for years for its two excellent interior wall paints: Nice & Smooth
and Rich & Thick. The company has discovered that by processing Rich & Thick further it could produce a
slightly different paint.
Nice & Smooth and Rich & Thick are produced jointly at a cost of $160,000, which is allocated
equally between them. If Rich & Thick were processed further, its selling price would increase by $2.25
per unit, and the additional cost per unit would be $1.80.
1.
2.
On the basis of the information given (and disregarding qualitative factors), should the company
process Rich & Thick further? Do you have enough information to make a recommendation? Explain.
Interpretive Question: Is the joint cost of $160,000 relevant to this discussion? Why or why not?
EXERCISE 8-2
Sell Now or Process Further
Colorado Company uses a joint process to manufacture products R, S, and T. Each product can be sold at
the point of separation, or it can be processed further. All additional processing costs are directly traceable
to each product that is processed further. Joint production costs for the year are $140,000 and are allocated
to products R, S, and T on the basis of their sales values at the point of separation. The pertinent data
accumulated by the accounting department for these products are:
Product
R
S
T
1.
2.
Sales Value and Additional
Costs of Processing Further
Units
Sales Value
at Separation
Allocation of
Joint Costs
Sales Value
Additional Costs
18,000
20,000
10,000
$150,000
120,000
30,000
$70,000
56,000
14,000
$190,000
150,000
60,000
$24,000
40,000
25,000
Which products should Colorado Company process further (after separation) in order to maximize its
profits? Show computations.
Explain why you did or did not use the allocated joint costs in deciding which of the products to
process further.
PROBLEM 8-1
Processing Past the Point of Separation
Style Company manufactures three items, S1, S2, and S3, which are used in the production of fabrics. Each
item can be sold at the point that all three are separated from the joint production process, or they can be
processed further. Presently, S1 and S2 are processed past the point of separation. The joint cost of
producing the three items to the point of separation is $450,000. The costs past the point of separation are
variable and can be traced to each product. The $450,000 joint costs are allocated to each product equally.
The following information is available:
Number
of Units
Selling Price
per Unit
at Point of
Additional
Processing
Selling Price
per Unit
After
S1
S2
S3
Produced
Separation
Costs
Processing
100,000
40,000
60,000
$10
9
11
$120,000
90,000
?
$12
11
13
Required:
1. Should S1 and S2 be processed after the separation point?
2. What maximum additional processing costs could be incurred to process S3 further and still leave
a profit?