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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 at Split-Off or Process Further

Eunice Company produces two products from a joint process. Joint costs are $70,000 for one batch, which yields 1,000 liters of germain and 4,000 liters of hastain. Germain can be sold at the split-off point for $24 or be processed further, into geraiten, at a manufacturing cost of $4,100 (for the 1,000 liters) and sold for $33 per liter.

If geraiten is sold, additional distribution costs of $0.80 per liter and sales commissions of 10% of sales will be incurred. In addition, Eunice’s legal department is concerned about potential liability issues with geraiten—issues that do not arise with germain.

Required:

  1. 1. CONCEPTUAL CONNECTION Considering only gross profit, should germain be sold at the split-off point or processed further?
  2. 2. CONCEPTUAL CONNECTION Taking a value-chain approach (by considering distribution, marketing, and after-the-sale costs), determine whether or not germain should be processed into geraiten.

1.

To determine

Describe whether the company should sell Germain at split-off or process further while considering only gross profit.

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.

The following table represents the most appropriate alternative regarding the sell-or-process further decision:

CostsAlternativesDifferential amount to process further ($)
Sell ($)Process further ($)
Revenues124,00033,0009,000
Processing cost (4,100)(4,100)
Gross profit24,00028,9004,900

Table (1)

The gross profit to process Germain further is $28,900 which is more than the gross profit to sell at split-off. Therefore, the company should process the Germain product as there is an increase in gross profit worth $4,900 for every 1,000 liters...

2.

To determine

Describe whether the company should process Germain further into Geraiten while taking a value-chain approach.

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