- This topic has 3 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Jorios Co makes joint products X & Y , $120k joint processing costs are incurred. At the split off point, 10000 units of X & 9,000 units of Y are produced, with selling prices of $1.20 for X and $1.50 for Y.
The units of X could be further processed to make 8,000 units of product z. The extra costs incurred in this process would be fixed costs of $1,600 and VC of $0.50 per units of input .
Selling price of Z would be $2.25.What would be the outcome if product x is further processed?
Well my query is this Sir, do we Ignored the sunk costs ($120k) incurred for the joint processing?
Solution as provided by kaplan kit = $600 loss.
Sale value of X $12,000(10,000*$1.20)
Further processing costs= $6,600 ( $0.50* 8000 u + $1600)Sale value of Z after further processing = $18,000 ( $2.25*8000)
Net return = $11,400 (18,000 – $6,600) which is $600 less than sales value of X.
Thank you sir!
It is not that the joint costs are sunk costs – the are a cost of Product X and therefore a cost of Product Z if there is further processing.
However, to decide whether or not it is worth doing the extra processing, we calculate what the extra revenue will be (in this case an extra $6,000) and what the extra costs will be (in this case an extra $6,600). The difference is the extra profit or loss as a result of doing the extra processing. Here the extra costs are more than the extra revenue by $600. Therefore if we do the extra processing we end up making $600 less profit than if we do not do the processing. Therefore it is not worthwhile doing the extra processing.
Thank you sir. With your narrative , the $120k is effectively not related to your calculation exactly same with Kaplan. What this means is that we are looking at the incremental cash flow . I was able go through again the whole text and ignored the kit.
Kaplan in its text said we should take the difference of revenue generated and any added costs by ignoring the joint cost as sunk costs . Sorry, technically is not correct based your explanation. It was a joint cost to produce to Product X.
You taught me F2 on processing costs so I have no problems at all.
Thank you very much sir. I hope to bring you good news on PM results and look further to APM!
It is correct as per my explanation.
Although I would not refer to the $120K as a sunk cost (and I do not care what Kaplan choose to call it), it is of no relevance because we are simply concerned with whether or not it is worth spending extra to earn extra revenue. So it doesn’t matter what you choose to call the $120K, but it of no relevance to the solution.
It would only be relevant if you had been asked to calculate the total value of Product X – then you would include all costs including part of the joint cost.
(Incidentally, the chance of this kind of question being asked in Paper PM these days is very small, because it is examined in Paper MA).
- You must be logged in to reply to this topic.