Wexpro Inc produces several products from processing 1 ton o

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $66,000 per ton, one-fourth of which is allocated to product X15. Seven thousand four hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $18 each, or processed further at a total cost of $9,500 and then sold for $23 each.

Required:

1. What is the financial advantage (disadvantage) of further processing product X15?

2. Should product X15 be processed further or sold at the split-off point?

Solution

1 (Figure in $) Sales value if processed further       1,70,200 (7,400 units x $23 per unit) Sales value at the split-off point       1,33,200 (7,400 units x $18 per unit) Incremental revenue         37,000 Less cost of processing further           9,500 Net advantage of processing further         27,500 Note: The $66,000 cost incurred up to the split-off point is not relevant in a decision of what to do after the split-off point 2 Should be processed further.