Question

Guster Chemical Company (GCC) manufactures two products as part of a joint process: X1 and Y1. Joint costs up to the split-off point total $17,500. The joint costs are allocated to X1 and Y1 in proportion to their relative sales values. At the split-off point, product X1 can be sold for $33,600, whereas product Y1 can be sold for $62,400. Product X1 can be processed further to make product X2, at an incremental cost of $33,500. X2 can be sold for $80,500. Product Y1 can be processed further to make product Y2, at an incremental cost of $43,500. Y2 can be sold for $90,500.

The net change in operating income resulting from a decision to manufacture product X2 is:

Answer 1

The net change in operating income resulting from a decision to manufacture product X2 :

Incremental Revenue (Revenue after further processing - Revenue at split off point) = 80,500 - 33,600	46,900
Less: Further Process Cost	(33,500)
increase in Operating Income	13,400

Joint process costs or costs upto split off point are sunk cost as they are already incurred, hence irrelevant