Cotopaxi makes backpacks. Traditionally, they bought fabric in quantity, and cut out the forms for their backpacks from large pieces, discarding the interstitial material as scrap. Due to the integrated nature of the production facility, the cost of all this fabric was considered a joint cost, allocated by the approximate relative sales value method, and the scraps were considered a waste by-product.

Recently however, an enterprising employee had the great idea to use these scraps and make small, unique bags from the heretofore-discarded pieces of fabric. The company agreed to implement this idea on a trial basis, and the accounting department decided to consider these bags a by-product using the net realizable value method.

The marketing department set the price for the by-product bags at $50, and in the first year of production, 10,000 of these scrap bags were sold. At the end of the first year, the accounting department determined that each bag incurred an additional processing cost of $40 on average in additional materials (straps, buckles, thread, etc.), labor, and variable overhead (not including the cost of the scrap fabric from whence they came).

What happened to the joint cost of fabric allocated to the main product lines when the new by-product bags were introduced?

Increased the joint costs allocated to the other products

Decreased the joint costs allocated to the other products

No change in joint costs allocated to the other products

What did this new line of by-product bags do to the recognized profitability of Cotopaxis main backpack products?

Increased the profitability of the main products

Decreased the profitability of the main products

No change in the profitability of the main products

What did this new line of by-product bags do to the total profitability of Cotopaxis as a whole? (Note: assume the new bags only incurred the variable costs listed above)

Increased overall profitability

Decreased overall profitability

No change to overall profitability