Striker Chemical Lab manufactures liquids into three different outputs: Freisa, Bracko, and Pragin. Freisa accounts for 56 percent of the net realizable value at the split-off point, Bracko accounts for 29 percent, and Pragin accounts for the balance. The joint costs total $644,000. If Pragin is accounted for as a by-product, its $74,000 net realizable value at split-off is credited to the joint manufacturing costs by crediting the by-product’s net realizable value as a reduction in the joint costs.Questions: How should management decide whether a product should be sold at splitoff or processed further?Explain for Striker if the sales value at split off method of joint-cost allocation is the best method for generating the information needed to make a decision. What does this mean for the by-product output Pragin?

Question
Asked Nov 13, 2019
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Striker Chemical Lab manufactures liquids into three different outputs: Freisa, Bracko, and Pragin. Freisa accounts for 56 percent of the net realizable value at the split-off point, Bracko accounts for 29 percent, and Pragin accounts for the balance. The joint costs total $644,000. If Pragin is accounted for as a by-product, its $74,000 net realizable value at split-off is credited to the joint manufacturing costs by crediting the by-product’s net realizable value as a reduction in the joint costs.

Questions:

  1. How should management decide whether a product should be sold at splitoff or processed further?
  2. Explain for Striker if the sales value at split off method of joint-cost allocation is the best method for generating the information needed to make a decision. What does this mean for the by-product output Pragin?
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Step 1

1. In order to determine if the product needs to be processed further or sold at split off point, the total profitability needs to be considered. The cost allocated to all the products are as follows

 

Bracko
56%
Total
Freisa
Pragin
Net realisable value %
Joint on the basis of net realisable %
sale price if Pargin is sold at split off
Loss if product sold at split off
29%
15%
360640
186760
96600
644000
-74000
22600
help_outline

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Bracko 56% Total Freisa Pragin Net realisable value % Joint on the basis of net realisable % sale price if Pargin is sold at split off Loss if product sold at split off 29% 15% 360640 186760 96600 644000 -74000 22600

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Step 2

In order to determine if the product needs to be sold at splitoff, if the total loss is reduced by processing further and the further processing cost enhances the value of the product more than the cost of pro...

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