EXAMPLE 4 : SELL OR PROCESS FURTHER

XYZ Inc. produces three products from a common input. The joint cost for a typical quarter is as follows:

Direct materials : $30,000

Direct labor : $50,000

Overhead : $60,000

The revenues from each product are as follows :

Product X : $80,000

Product Y : $100,000

Product Z : $70,000

Management is considering processing Product A beyond the split off point, which would increase the sales value of Product A to $120,000. However, to process Product A further requires the company to rent some additional equipment costing $30,000 per quarter. Additional materials and labor also needed would cost $15,000 per quarter.

Required :

1. What is the gross profit currently being earned by the three products for one quarter?

2. What is the effect on quarterly profits if the company decides to process Product A further?