A company manufactures three products using the same production process. The costs incurred up to the split-off point are $197,300. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follows

Product Number of Units Produced Selling Price at Split-Off Selling Price after Processing Additional Processing Costs
D 4,742 $10.32 $15.00 $16,123
E 5,741 11.26 16.27 21,118
F 2,340 19.53 22.80 11,232

(A1)

Determine incremental profit (loss) of each product.

(A2)

Which product(s) should proceed further and which should be sold at the split-off point?

Please refer to Explanation.

Explanation:

(A1)

The Incremental Profit (loss) is what is made if we decided to process a good further before we sell it.

To answer this question we will calculate the Incremental profit (loss) for each product sequentially using the following formula,

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

Product D

Incremental Profit = 4,742(15.00) - 16,123 - (4742 * 10.32)

= $6,069.56

$6,069.56 is the Incremental Profit for Product D

Product E

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

= (5,741 * 16.27) - 21,118 - (5,741 * 11.26)

= $7,644.41

$7,644.41 is the Incremental Profit for Product E

Product F

Incremental Profit = Units * (Selling Price after Processing) - Additional Processing Costs - (Units*Selling Price) at Split-Off.

= (2,340 * 22.80) - 11,232 - (2,340*19.53)

= -$3,580.20

-$3,580.20 is the Incremental Loss for Product F

(A2)

Products D and E should proceed further as they result in Profit ✔️✔️

Product F should be sold at the split-off point as it give an Incremental loss. ❌

answer; ///i believe the correct answer is (c) laissez-faire;