Reference no: EM132965530

Oates Tannery manufactures three main products from a common input in a joint processing operation. Joint processing costs up to the split-off point are as follows:

Direct materials 150,000
Direct labour 180,000
Supervisor's salary 150,000
Security 50,000
Custodian salaries 40,000
Utilities 30,000

The company allocates these costs to the joint products on-the-basis of their total sales at the split-off point. Each of the products may be sold at the split-off point or processed further.

The additional processing costs and sales value after further processing for each product, on an annual basis, are:

                                             Further                   Sales Value
                            Sales Value       Processing          After Further
Product               at Split-off           Costs              Processing
X                           $300,000          $ 150,000          $460,000
Y                          $200,000           $ 190,000           $360,000
Z                       $100,000             $ 170,000             $320,000

The "Further Processing Costs" consist of variable and avoidable fixed costs.

Required:

Problem a) Which product or products should be sold at the spilt-off point, and which product or products should be processed further? Show computations.

Problem b) F18 is a minor by-product of the above process and is not included in the above calculations. It is sold after minor further processing. The following information has been provided:

Sales $12,000
Variable costs 2,000
Traceable fixed costs 6,000
Common fixed costs 10,000
Operating loss ($6,000)

What would happen to oats Ltd.'s operating income if F18 was scrapped at no cost at the split-off point rather than processed further? Should oats Ltd. process F18 further?