US CMA Part 2 · Chapter 6 · Question 22 of 22
Norcross Foods incurs joint costs of $120,000, of which $60,000 is allocated to Product B. B yields 20,000 kg, which can be sold at split-off for $9.00 per kg or processed further at a total cost of $70,000 and sold for $12.20 per kg. What should Norcross do?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Sell at split-off, because processing further reduces profit by $6,000
Explanation
Incremental revenue = ($12.20 - $9.00) x 20,000 = $64,000. Incremental cost = $70,000. Net effect of further processing = $64,000 - $70,000 = -$6,000, so B should be sold at split-off. Allocated joint cost is irrelevant to the decision because it is incurred either way.
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