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?