Bowen Company produces products P, Q, and R from a joint production process. Each product may be sold at the split-off point or be processed further. Joint production costs of $81,000 per year are allocated to the products based on the relative number of units produced. Data for Bowen's operations for the current year are as follows:
Product Units Produced Allocated Joint Prod. Cost Sales Value at Split-off
P 4000 $28000 $38000
Q 7000 49000 47000
R 2000 14000 16000
Product P can be processed beyond the split-off point for an additional cost of $10,000 and can then be sold for $50,000. Product Q can be processed beyond the split-off point for an additional cost of $35,000 and can then be sold for $65,000. Product R can be processed beyond the split-off point for an additional cost of $6,000 and can then be sold for $25,000.
Required:
Which products should be processed beyond the split-off point? Explain your results.
This question is kind of tricky. In this problem, you actually want to disregard the $81,000 joint production cost because it is a sunk cost, meaning you have to pay it regardless of your decision, so it should not be a factor.
Product P: If you spend an extra $10,000, product P will be worth $12,000 more (50,000 – 38,000). Therefore, you want to process Product P beyond the split-off in order to make $2,000 in profit.
Product Q: If you spend an extra $35,000, Product Q will be worth $18,000 more (65,000 – 47,000). You therefore do not want to process this product further because you would lose $17,000.
Product R: If you spend an extra $6,000, Product R will be worth $9,000 more (25,000 – 16,000). Product R should be processed further so that the company makes an extra $3,000 in profit.
Conclusion: Process Product P & R beyond split-off, but not Product Q.