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A company manufactures three products using the same production process. The costs incurred up to the split-off point are $197,300. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follows

Product Number of Units Produced Selling Price at Split-Off Selling Price after Processing Additional Processing Costs
D 4,742 $10.32 $15.00 $16,123
E 5,741 11.26 16.27 21,118
F 2,340 19.53 22.80 11,232

(A1)

Determine incremental profit (loss) of each product.

(A2)

Which product(s) should proceed further and which should be sold at the split-off point?

Answer :

Parrain

Answer: Please refer to Explanation.

Explanation:

(A1)

The Incremental Profit (loss) is what is made if we decided to process a good further before we sell it.

To answer this question we will calculate the Incremental profit (loss) for each product sequentially using the following formula,

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

Product D

Incremental Profit = 4,742(15.00) - 16,123 - (4742 * 10.32)

= $6,069.56

$6,069.56 is the Incremental Profit for Product D

Product E

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

= (5,741 * 16.27) - 21,118 - (5,741 * 11.26)

= $7,644.41

$7,644.41 is the Incremental Profit for Product E

Product F

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

= (2,340 * 22.80) - 11,232 - (2,340*19.53)

= -$3,580.20

-$3,580.20 is the Incremental Loss for Product F

(A2)

Products D and E should proceed further as they result in Profit ✔️✔️

Product F should be sold at the split-off point as it give an Incremental loss. ❌

For Product D the incremental profit is $6,069.56, for product E the incremental profit is $7,644.41, For Product F the incremental loss is $3,580.20.

Incremental Profit or Loss

The Incremental profit or loss is  the changes in process of production cost which affects revenue either negatively or positively.

The Formula for calculating Incremental profit or loss is:

(Units × Selling Price after Processing) - Additional Processing Costs - (Units × Split-Off selling price).

Answer A1:

Incremental Profit of Product D = 4,742(15.00) - 16,123 - (4742 × 10.32) = $6,069.56

Incremental Profit of product E = (5,741 × 16.27) - 21,118 - (5,741 × 11.26)

= $7,644.41

Incremental Loss of Product F = (2,340 × 22.80) - 11,232 - (2,340 × 19.53)

= - $3,580.20

Answer A2

Products D and E should proceed further and Product F should be sold at the split-off point.

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