10.5 Decision Making - Sell As Is or Process Further Flashcards
A corporation manufactures two products that are considered joint products. Common costs of $350,000, allocated using the physical measures method, yield 15,000 units of Product A and 20,000 units of Product B. Product B incurs $50,000 of direct costs and sells for $15 per unit. The company has the option of processing Product B further. This action would increase the product’s direct costs by $35,000 and would increase the unit selling price to $17. If the company further processes Product B, its income will
A. Decrease by $45,000.
B. Increase by $5,000
C. Increase by $55,000
D. Increase by $105,000.
B. Increase by $5,000
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.25, which maintains the same gross profit percentage.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1.50).
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?
A. The operating profit last month was $50,000, and the inventory value is $15,000.
B. The operating profit last month was $50,000, and the inventory value is $45,000.
C. The operating profit last month was $125,000, and the inventory value is $30,000.
D. The operating profit last month was $200,000, and the inventory value is $30,000.
B. The operating profit last month was $50,000, and the inventory value is $45,000.
Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 ÷ (60,000 units of AM-12 + 40,000 units of BM-36)]. The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost ÷ 60,000 units)]. Total inventory value is $45,000 (10,000 units × $4.50), and total operating profit is $50,000 [50,000 units sold × ($5.50 unit price – $4.50 unit cost)].
A company produces X-547 in a joint manufacturing process. The company is studying whether to sell X-547 at the split-off point or upgrade the product to become Xylene. The following information has been gathered:
Which of the following can be ignored?
A. Variable manufacturing costs of the upgrade process.
B. Avoidable fixed costs of the upgrade process.
C. Selling price per pound of X-547.
D. Joint manufacturing costs to produce X-547
D. Joint manufacturing costs to produce X-547
Common, or joint, costs cannot be identified with a particular joint product. By definition, joint products have common costs until the split-off point. Costs incurred after the split-off point are separable costs. The decision to continue processing beyond split-off is made separately for each product. The costs relevant to the decision are the separable costs because they can be avoided by selling at the split-off point. They should be compared with the incremental revenues from processing further. Thus, the joint manufacturing costs are the only irrelevant item and should be ignored in making the upgrade decision.
There is a market for both product X and product Y. Which of the following costs and revenues would be most relevant in deciding whether to sell product X or process it further to make product Y?
A. Total cost of making Y and the revenue from sale of Y.
B. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
C. Additional cost of making X, given the cost of making Y, and additional revenue from Y.
D. Total cost of making X and the revenue from sale of X and Y.
B. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
Incremental costs are the additional costs incurred for accepting one alternative rather than another. Questions involving incremental costing (sometimes called differential costing) decisions are based upon a variable costing analysis. The typical problem for which incremental cost analysis can be used involves two or more alternatives, for example, selling or processing further. Thus, the relevant costs and revenues are the marginal costs and marginal revenues.
A company produces ready-to-bake pie crusts. In deciding whether to process this product further into complete ready-to-bake pies by adding filling, relevant dollar amounts to consider would include all of the following except the
A. Cost to add the filling.
B. Selling price of the crusts.
C. Selling price of the complete pies.
D. Cost to manufacture the crusts.
D. Cost to manufacture the crusts.
Cost to manufacture the crusts is a joint cost incurred up to the point where a company decides whether to process further or not. In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk cost.
In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products after the split-off point should be viewed as
A. Sunk costs.
B. Differential costs.
C. Standard costs.
D. Relevant costs.
A. Sunk costs.
Joint costs incurred prior to the split-off point are not relevant to the decision whether or not to process further because they have already been incurred, i.e., they are sunk costs.
A circuit board company conducts a joint manufacturing process to produce 10,000 units of Board A and 10,000 units of Board B. The total joint variable manufacturing cost to produce these two products is $2,000,000. The company can sell all 10,000 units of Board B at the splitoff point for $300 per unit, or process Board B further and sell all 10,000 units at $375 per unit. The total additional cost to process Board B further would be $500,000, and all additional costs would be variable. If the company decides to process Board B further, what effect would the decision have on operating income?
A. $2,250,000 increase in operating income.
B. $250,000 increase in operating income.
C. $3,250,000 increase in operating income.
D. $750,000 decrease in operating income.
B. $250,000 increase in operating income.
If Board B is sold at the split-off point, the total revenue is $3,000,000 ($300 × 10,000 units). If Board B is processed further, the total revenues will be $3,750,000 ($375 × 10,000 units) and the increase in variable cost will be $500,000, resulting in a net figure of $3,250,000. The total joint variable manufacturing costs are irrelevant to the decision because they will be incurred regardless of whether B is sold at split-off or processed further. Therefore, if Board B is processed further, operating income will increase by $250,000 [($3,750,000 – $500,000) – $3,000,000].
A company uses a joint manufacturing process in the production of two products, Gummo and Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a cost of $20,000. Each batch of Gummo uses 60% of the Valdene and incurs $10,000 of separate costs. The resulting 3,000 pounds of Gummo sells for $10 per pound. The remaining Valdene is used in the production of Xylo, which incurs $12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for $12 per pound. The company uses the net realizable value method to allocate the joint material costs. The company is debating whether to process Xylo further into a new product, Zinten, which would incur an additional $4,000 in costs and sell for $15 per pound. If Zinten is produced, income would increase by
A. $26,000
B. $5,760
C. $14,000
D. $2,000
D. $2,000
If Xylo is processed further, the incremental sales revenue will be $6,000 [2,000 pounds × ($15 – $12)]. After subtracting the incremental costs, operating income will increase by $2,000 ($6,000 – $4,000).
A corporation produces two joint products, JP-1 and JP-2, and a single by-product, BP-1, in Department 2 of its manufacturing plant. JP-1 is subsequently transferred to Department 3, where it is refined into a more expensive, higher-priced product, JP-1R, and a by-product known as BP-2. Recently, a competitor introduced a product that would compete directly with JP-1R, and as a result, the corporation must re-evaluate its decision to process JP-1 further. The market for JP-1 will not be affected by the competitor’s product, and the corporation plans to continue production of JP-1, even if further processing is terminated. Should this latter action be necessary, Department 3 will be dismantled. Which of the following items should the corporation consider in its decision to continue or terminate Department 3 operations?
- The selling price per pound of JP-1.
- The total hourly direct labor cost in Department 3.
- Unit marketing and packaging costs for BP-2.
- Supervisory salaries of Department 3 personnel who will be transferred elsewhere in the plant, if processing is terminated.
- Department 2 joint cost allocated to JP-1 and transferred to Department 3.
- The cost of existing JP-1R inventory.
A. 2, 3, 5, 6
B. 2, 3, 4
C. 1, 2, 3
D. 1, 2, 3, 4, 5
C. 1, 2, 3
If further processing is ended, the selling price of JP-1 will be relevant instead of the price of JP-1R. The cost of direct labor in Department 3 is relevant because it will be saved if further processing is ended. Marketing and packaging costs for BP-2 are relevant because they will be saved if Department 3 is closed.
A corporation manufactures two products in a joint process incurring $150,000 of joint costs per batch that are allocated using the physical-measure method. Each batch yields 1,000 units of Product A and 4,000 units of Product B. Separable costs are $20,000 for Product A and $20,000 for Product B. Both products sell for $50 per unit. The corporation has the option of processing Product B further to produce 4,000 units of Product C, incurring additional costs of $8,000. The corporation should produce Product C if the selling price per unit is greater than
A. $52.00
B. $37.00
C. $57.00
D. $32.00
A. $52.00
The unit price of Product B is known to be $50.00. The additional unit cost of further processing is $2.00 ($8,000 ÷ 4,000 units). Consequently, the unit price must be at least $52.00 ($50.00 opportunity cost + $2.00).
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.
D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.25, which maintains the same gross profit percentage.
A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1.50).
A firm manufactures several different products, including a premium lawn fertilizer and weed killer that is popular in hot, dry climates. The firm is currently operating at less than full capacity because of market saturation for lawn fertilizer. Sales and cost data for a 40-pound bag of lawn fertilizer is as follows.
Selling price $18.50
Production cost:
Materials and labor $12.25
Variable overhead 3.75
Allocated fixed overhead 4.00
= Income (loss) per bag $ (1.50)
On the basis of this information, which one of the following alternatives should be recommended to management?
A. Increase output and spread fixed overhead over a larger volume base.
B. Select a different cost driver to allocate its overhead.
C. Drop this product from its product line.
D. Continue to produce and market this product.
D. Continue to produce and market this product.
The relevant margin on this product is $2.50, not a loss of $(1.50). The fertilizer is covering all of its variable costs with some left over to cover fixed costs (the fixed costs that have been allocated are not traceable to this product).
