Dixie Highway Corporation manufactures products J, K, and L in a joint process. The company incurred $480,000 of joint processing costs during the period just ended and had the following data that related to production:??Sales values and Additional cost if Processed Beyond Split-offProductSales Value at Split-offSales ValueAdditional costJ$400,000$550,000$130,000K350,000540,000240,000L850,000975,000118,000An analysis revealed that all costs incurred after the split-off point are variable and directly traceable to the individual product line.Required: A. If Dixie Highway allocates joint costs on the basis of the products' sales values at the split-off point, what amount of joint cost would be allocated to product J?B. If production of J totaled 50,000 gallons for the period,
determine the relevant cost per gallon that should be used in decisions that explore whether to sell at the split-off point or process further? Briefly explain your answer.C. At the beginning of the current year, Dixie Highway decided to process all three products beyond the split-off point. If the company desired to maximize income, did it err in regards to its decision with product J? Product K? Product L? By how much?
What will be an ideal response?
A. The total sales value at split-off amounts to $1,600,000 ($400,000 + $350,000 + $850,000). Since J has 25% of the sales value ($400,000 ÷ $1,600,000), Dixie Highway would allocate $120,000 of joint cost ($480,000 × 25%).
B. Joint costs are not relevant in making this decision because the amounts have already been incurred and are the same regardless of what the company decides to do. The only relevant cost is cost incurred beyond the split-off, which for J amounts to $2.60 per gallon ($130,000 ÷ 50,000 gallons).
C. As noted in part "B," joint cost is not relevant for sell at split vs. process further decisions. Rather, one must explore differential revenue vs. differential cost, as follows:
J: ($550,000 - $400,000) vs. $130,000 = $20,000
K: ($540,000 - $350,000) vs. $240,000 = $(50,000)
L: ($975,000 - $850,000) vs. $118,000 = $7,000
The company erred in processing K beyond the split point and lost $50,000 in the process.
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