Q1 A company produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below are cost and selling price data for a recent period.
Product 10:
Sales Value at Split-Off: $60,000
Cost to Sales Value at Split-Off: $100,000
Process after Further Processing: $190,000
Product 12:
Sales Value at Split-Off: $15,000
Cost to Sales Value at Split-Off: $30,000
Process after Further Processing: $35,000
Product 14:
Sales Value at Split-Off: $55,000
Cost to Sales Value at Split-Off: $150,000
Process after Further Processing: $215,000
Instructions:
(a) Determine total net income if all products are sold at the split-off point.
(b) Determine total net income if all products are sold after further processing.
(c) Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further.
Q2 Cawley Company makes three models of tasers. Information on the three products is given below:
Tingler:
Sales: $300,000
Variable expenses: $150,000
Contribution margin: $150,000
Fixed expenses: $120,000
Net income: $30,000
Shocker:
Sales: $500,000
Variable expenses: $200,000
Contribution margin: $300,000
Fixed expenses: $230,000
Net income: $70,000
Stunner:
Sales: $200,000
Variable expenses: $145,000
Contribution margin: $55,000
Fixed expenses: $95,000
Net income: $(40,000)
Fixed expenses consist of $330,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Tingler), $50,000 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income.
Instructions:
(a) Compute current net income for Cawley Company.
(b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)
(c) Should Cawley eliminate the Stunner product line? Why or why not?
