Further processing decision

Dear Tutor, We know that we ignore common cost or joint cost because it is not relevant but we include further processing cost as relevant cost. In the case of external maket, common cost also deducted from further sales revenue and why?do we always consider common cost in the case of external market price ?

Dee Co produces three liquid pharmaceuticals L1, L2 and L3 from a
common process. They must be produced and sold together.

1,000 litres of each of the three products are produced, incurring common
process costs of $20,000 in total. The selling prices per litre for the three
products at the end of the common process are:

Selling price per litre
L1———– $6
L2 ————$5
L3————- $8

Alternatively, all three liquids can be processed further into products L1A,
L2A and L3A.They also must all be sold together or not at all. The selling
prices would then be:

Selling price per litre
L1A ———–$9
L2A ———–$7
L3A ———–$10

If L1, L2 and L3 are processed further, the following costs are incurred

Further processing costs
L1 to L1A ——-$1,000
L2 to L2A ———$2,000
L3 to L3A ———-$2,400

ii) there is an external market for products L1A, L2A and L3A?

Solution

If there is an external market for products L1A, L2A and L3A:

————–Quantity———-Selling price per litre ——————Sales Revenue
L1A———–1,000 litres——————$9———————————–$9,000
L2A————1,000 litres —————-$7 ————————————$7,000
L3A ———–1,000 litres —————–$10 ———————————$10,000
Total revenue ———————————————————————–$26,000
Common costs ——————————————————————–$(20,000)
Further costs ————————————————————————$(5,400)
Net revenue after further processing ———————————————-$600