General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.

Joint costs allocated to product A1 total:
a. $8,800.
b. $13,200.
c. $11,000.
d. $22,000.

Joint costs allocated to product B1 total:
a. $8,800.
b. $13,200.
c. $11,000.
d. $22,000.

The net change in operating income resulting from a decision to manufacture product A2 is:
a. $43,000 (increase).
b. $5,000 (decrease).
c. $5,000 (increase).
d. $38,000 (increase).

The net change in operating income resulting from a decision to manufacture product B2 is:
a. $16,000 (increase).
b. $16,000 (decrease).
c. $48,000 (decrease).
d. $32,000 (increase).

1- a. $8,800

2- b. $13,200

3- c. $5,000 (increase)

4- b. $16,000 (decrease)

Explanation:

1- The joint cost allocated to product A1 is $8,800.

Total sales value of A1 + B1 = $42,000 + $63,000 = $105,000.

The joint cost allocated to product A1 is calculated from formula ;

Joint cost till split off point * (Sales value of A1 / Total sales value of A1 + B1 )

$22,000 x ($42,000 / $105,000)

=  $8,800.

2- The joint cost allocated to product B1 is $13,200.

Total sales value of A1 + B1 = $42,000 + $63,000 = $105,000.

The joint cost allocated to product B1 is calculated from formula ;

Joint cost till split off point * (Sales value of B1 / Total sales value of A1 + B1 )

$22,000 x ($63,000 / $105,000)

=  $13,200.

3- The net change in operating income resulting from a decision to manufacture product A2 is $5,000 increase.

This can be calculates as, A1 profit - A2 profit

Product A1 profit = Sales value - Cost allocated

Product A1 profit = $42,000 - $8,800

Product A1 profit = $33,200.

Product A2 profit = Sales value - Cost allocated - incremental cost

Product A2 profit = $85,000 - $8,800 - $38,000

Product A2 profit = $38,200.

Net change in operating income = $5,000 ($38,200 - $33,200)

4- The net change in operating income resulting from a decision to manufacture product B2 is $16,000 decrease.

This can be calculates as, B1 Profit - B2 profit

Product B1 profit = Sales value - Cost allocated

Product B1 profit = $63,000 - $13,200

Product B1 profit = $49,800.

Product B2 profit = Sales value - Cost allocated - incremental cost

Product B2 profit = $95,000 - $13,200 - $48,000

Product B2 profit = $33,800.

Net change in operating income = $16,000 decrease ($49,800 - $33,800).

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