Illustration
Fargo Ltd., manufactures two joint products P and Q. The following cost information is available from the company records.
|
Particulars
|
Rs.
|
|
Sales (P and Q)
|
9,37,500
|
|
Direct material
|
2,81,250
|
|
Direct wages
|
1,37,500
|
|
Variable overheads 150 % of direct wages
|
|
|
Fixed cost
|
2,50,000
|
The product P's sales constitute two-thirds of the total sales. The management is planning to process the joint products further to sell at a higher price. The following are the cost information estimated for further processing.
|
|
(Amount in Rs.)
|
|
Particulars
|
P
|
Q
|
Total
|
|
Sales after further processing
|
7,50,000
|
3,75,000
|
11,25,000
|
|
Direct material
|
62,500
|
25,000
|
87,500
|
|
Direct wages
|
25,000
|
10,000
|
35,000
|
You are required to advice the management whether the further processing will be profitable.
Solution
Statement showing incremental revenue and differential cost
|
|
(Amount in Rs.)
|
|
Particulars
|
P
|
Q
|
Total
|
|
Sales on further processing
Less: Sales before processing
|
7,50,000
6,25,000
|
3,75,000
3,12,500
|
11,25,000
9,37,500
|
|
Incremental revenue
|
1,25,000
|
62,500
|
1,87,500
|
|
Additional cost on processing:
Direct material
Direct wages
Variable overheads
|
62,500
25,000
37,500
|
25,000
10,000
15,000
|
87,500
35,000
52,500
|
|
Total additional cost
|
1,25,000
|
50,000
|
1,75,000
|
|
Profit on further processing
|
Nil
|
12,500
|
12,500
|
The management should process product Q that gives extra profit to the business and product P should be sold from the present stage and it does not require further processing.
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