CAF-5 · Chapter 17 · Question 2 of 20
(Relevant Costing & Joint Products) Products Alpha and Beta are joint products emerging at a split-off point with total joint costs of Rs. 200,000. Product Alpha can be sold at the split-off point for Rs. 100,000. Alternatively, it can be processed further and sold for Rs. 125,000. The further processing department incurs costs of Rs. 40,000, which includes Rs. 10,000 of general factory overheads absorbed based on machine hours. What is the financially optimal decision regarding Product Alpha?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Sell at split-off, as further processing yields an incremental loss of Rs. 5,000.
Explanation
Joint costs (Rs. 200,000) are sunk and irrelevant. Incremental Revenue = Rs. 125,000 (Final) - Rs. 100,000 (Split-off) = Rs. 25,000. Incremental Cost = Total further processing (Rs. 40,000) - Absorbed general overheads (Rs. 10,000 non-cash/unavoidable) = Rs. 30,000 relevant cost. Incremental Profit = 25,000 - 30,000 = (Rs. 5,000) Loss. It is better to sell at split-off.
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