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Dear John,
A process produces two joint products A and B in equal physical quantities. A and B are sold at split off point for $5 per kg and $8 per kg respectively. There are no further costs after the split off point. If joint costs are apportioned on a relative sales value basis, which of the following statements is true?
A. Both products will have the same return on sales ratio (operating margin) ?
B. Product A will have the higher return on sales ratio (operating margin)
C. The cost per kg will be the same for both products
D. The cost per kg of product A will be higher than that of product BThe answer sheet marks the answer as A.
Shouldn’t the answer be B? because since Product A has a lower cost wouldn’t it mean that return on sales would be higher for product A than for product B?
Please help me grasp the concept if I’m wrong.
Thank You!
If the costs are split in the same ratio as the selling prices (i.e. 5:8) then the profits and hence the operating margins will be the same. Make up some figures and try it – you will see that it is the case 🙂
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