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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Sell or Process Further, Basic Analysis

Shenista Inc. produces four products (Alpha, Beta, Gamma, and Delta) from a common input. The joint costs for a typical quarter follow:

Chapter 8, Problem 64P, Sell or Process Further, Basic Analysis Shenista Inc. produces four products (Alpha, Beta, Gamma,

The revenues from each product are as follows: Alpha, $100,000; Beta, $93,000; Gamma, $30,000; and Delta, $40,000.

Management is considering processing Delta beyond the split-off point, which would increase the sales value of Delta to $75,000. However, to process Delta further means that the company must rent some special equipment that costs $15,400 per quarter. Additional materials and labor also needed will cost $8,500 per quarter.

Required:

  1. 1. What is the operating profit earned by the four products for one quarter?
  2. 2. CONCEPTUAL CONNECTION Should the division process Delta further or sell it at split-off? What is the effect of the decision on quarterly operating profit?

1.

To determine

Calculate the amount of operating profit earned by products for one quarter.

Explanation

Sell-or-Process-Further Decision:

Sell-or-process further decision can be defined as the analysis of relevant costing which emphasizes on decision making regarding whether to process the product beyond its split-off point.

Use the following formula to calculate the amount of operating profit:

Operating profit=Sales1Costs2

Substitute $263,000 for sales and $223,000 for costs in the above formula.

Operating profit=$263,000$223,000=$40,000

Therefore, the amount of operating profit is $40,000.

Working Notes:

1

2.

To determine

Describe whether Delta should be processed further or sold at split-off. Also, describe the effect on quarterly operating profit.

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