Becker- B2
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
a. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.
b. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $1.50, which covers the incremental costs.
c. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall's total costs.
d. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
Explanation
Choice “d” is correct. Whitehall should process further and sell to flank if the total selling price per unit after further processing is greater than $5.00.
Per Unit Totals
AM-12 AM-12 BM-36 Combined
Units 1 60,000 40,000 100,000
Joint costs $3.00 $180,000 ÷ $120,000 = $300,000
Further costs 1.50 90,000
Total costs 4.50 $270,000
Add gross margin at split-off:
($3.50 – 3.00) = .50
Minimum $5.00
Choices “b”, “a”, and “c” are incorrect, based on the above calculation.
Can anyone please explain to me the reason they're considering joint costs in calculating incremental costs?
Thanks!
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