US CMA Part 2 · Chapter 6 · Question 7 of 22
Dorset Chemicals produces 8,000 gallons of Product K from a joint process costing $96,000. K can be sold at split-off for $12 per gallon or processed further at a cost of $5 per gallon and sold for $18 per gallon. What is the effect on profit of processing further?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Increase of $8,000
Explanation
Incremental revenue from further processing = ($18 - $12) x 8,000 = $48,000. Incremental cost = $5 x 8,000 = $40,000. Net increase = $8,000, so K should be processed further. The $96,000 joint cost is incurred whichever choice is made and is irrelevant.
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