Thread: Accounting - Incremental Analysis

1. Accounting - Incremental Analysis

Im having problems with this question, any help would be great.

Benson Inc. 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. The cost and selling price data for the recent period are as follows: Product 12: Sales Value at split off point =$50,000
Cost to process further = $100,000 Sales value after further processing =$190,000

Product 14:
Sales Value at split off point = $10,000 Cost to process further =$30,000
Sales value after further processing = $35,000 Product 16: Sales Value at split off point =$60,000
Cost to process further = $150,000 Sales value after further processing =$220,000

a) Determine the total net income if all products were sold at the split off point
b) Determine the total net income if all products were 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
d) Determine the total net income using the results in c) and explain why the net income is different from that determined in b)

For a) would the net income just be 50,000+10,000+60,000 = 120,000 - 100,000 in costs which would equal a net income of $20,000? For b) would the net income be 190,000+35,000+220,000 = 445,000 in sales minus 100,000+30,000+150,000+100,000 = 380,000 in costs which gives a net income of$65,000?

If anyone could check my answers and help me out with parts c and d that would be great. Thanks

2. Assuming that each products' sales value is proportional to the cost that is required to make it, then the percentage of total cost for each product should be:

Product 12:

$\frac{50,000}{120000} = \frac{5}{12} = 0.42$

Since this product collects 42% of the profits, it should approximately take 42% of the cost to produce.

42% of $100000 =$42,000 in costs for this product

If we sell the product for 50000 and pay 42000 in production cost then 8000 is the income

After further processing, we add 100000 to the 42000 to get 142000 in costs and it is sold for 190000 for an income of 48000.

The incremental income for this would then be 48000 - 8000 = 40000

In this case, the product should be PROCESSED FURTHER

Product 14:

$\frac{10000}{120000} = \frac{1}{12} = 0.08$

8% of 100000 = 8000

You get 10000 off the product and have to pay approximately 8000 in costs for an income of 2000.

After further processing, you add 30000 in costs for 38000 and make 35000 for value to get an income of (3000)

The incremental income of this is (5000).

This product should be sold at SPLIT OFF

Product 16:

$\frac{60000}{120000} = 0.5$

50% of 100000 = 50000

Sold at split off for 60000 for 10000 in income.

Add 150000 to process further for a total cost of 200000.

Sold after processing for 220000 for 20000 in income.

Incremental income is 10000.

Product should be PROCESSED FURTHER.

d)

The new income is now 20000 + 48000 + 2000 = 70000

The reason why it is different than b is because you chose not to process further on product 14 and GAINED \$5000 dollars more than processing them all.

I hope this is right... I haven't done this in awhile.

3. Thanks for your help

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calculate incremental profit /(loss) and determine which products should be sold at split off

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