Cost Accounting Quiz: Further Processing Decisions
20 questions · exam conditions
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Further Processing DecisionsQuestion 1 of 20

AgriCorp produces joint products J and K. Product K can be sold at the split-off point for ($12) per gallon. Alternatively, it can be refined into Super-K and sold for ($20) per gallon. AgriCorp's policy is to only undertake further processing if the incremental operating income is at least 25% of the incremental revenue. What is the maximum further processing cost per gallon that AgriCorp would be willing to incur for the refinement of K into Super-K?

($8.00)
($6.00)
($5.00)
($2.00)
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Cost Accounting Quiz

Cost Accounting Quiz: Further Processing Decisions

Practice Further Processing Decisions in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Further Processing Decisions, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

AgriCorp produces joint products J and K. Product K can be sold at the split-off point for ($12) per gallon. Alternatively, it can be refined into Super-K and sold for ($20) per gallon. AgriCorp's policy is to only undertake further processing if the incremental operating income is at least 25% of the incremental revenue. What is the maximum further processing cost per gallon that AgriCorp would be willing to incur for the refinement of K into Super-K?

  1. ($8.00)
  2. ($6.00) (correct answer)
  3. ($5.00)
  4. ($2.00)
Explanation: This is a multi-step problem. First, calculate the incremental revenue per gallon: \20 - $12 = $8.Second,calculatetherequiredincrementalprofitpergallonbasedoncompanypolicy:25. Second, calculate the required incremental profit per gallon based on company policy: 25% of incremental revenue = 0.25 \times $8 = $2.Third,determinethemaximumallowablecost.SinceIncrementalProfit=IncrementalRevenue−IncrementalCost,themaximumcostis. Third, determine the maximum allowable cost. Since Incremental Profit = Incremental Revenue - Incremental Cost, the maximum cost is $8 - $2 = $6$.

Question 2

OrganiChem produces 5,000 units of Product Q from a joint process. The allocated joint cost to Product Q is ($55,000), or ($11) per unit. The sales value of Q at split-off is ($5) per unit. Product Q can be purified into Q-Prime for an additional variable cost of ($4) per unit. Q-Prime sells for ($12) per unit. What is the financial impact per unit of processing Q into Q-Prime compared to selling it at split-off?

  1. A ($3) increase in profit. (correct answer)
  2. A ($3) decrease in profit.
  3. A ($1) increase in profit.
  4. A ($6) decrease in profit.
Explanation: The allocated joint cost is a sunk cost and irrelevant to the decision. The fact that Product Q appears unprofitable at split-off (($5) revenue vs. ($11) allocated cost) is also irrelevant to the incremental analysis.\nIncremental Revenue per unit: ($12) (final price) - ($5) (split-off price) = ($7).\nIncremental Cost per unit: ($4).\nNet financial impact per unit: ($7) - ($4) = ($3) increase in profit.

Question 3

A mining company processes 30 tons of ore in a joint process, which yields 300 pounds of Grade 1 mineral and 900 pounds of Grade 2 mineral. The total joint cost for this batch was ($15,000), which is allocated based on weight. The company's fixed marketing budget is ($20,000) per month. Grade 2 mineral can be sold immediately for ($15) per pound or purified into Ultra-Grade 2 for ($25) per pound. The purification requires ($7) in variable chemical costs per pound and also requires a technician whose salary is ($4,000) per month. The technician only works on this purification process and would be laid off if it is discontinued.

What is the total incremental profit or loss from processing the 900 pounds of Grade 2 mineral into Ultra-Grade 2?

  1. A ($2,700) profit.
  2. A ($1,300) loss. (correct answer)
  3. A ($3,100) loss.
  4. A ($1,300) profit.
Explanation: The analysis should only include incremental revenues and costs. Joint costs, their allocation, and the marketing budget are irrelevant.\nIncremental Revenue: 900 lbs ×\times (($25) - ($15)) = 900 ×\times ($10) = ($9,000).\nIncremental Costs:\n- Variable costs: 900 lbs ×\times ($7) = ($6,300).\n- Avoidable fixed cost (technician salary): ($4,000).\n- Total incremental costs: ($6,300) + ($4,000) = ($10,300).\nIncremental Profit/Loss: ($9,000) - ($10,300) = (($1,300)) loss.

Question 4

PetroChem produces 80,000 gallons of heating oil per month, which can be sold as-is for ($2.00) per gallon. Alternatively, it can be processed into diesel fuel in a catalytic cracker at a variable cost of ($0.50) per gallon. Diesel sells for ($2.80) per gallon. The cracker could otherwise be used to process specialty chemicals for another division, which would generate a total contribution margin of ($20,000) per month. What is the net financial advantage or disadvantage of processing the 80,000 gallons of heating oil into diesel for the month?

  1. A ($24,000) advantage.
  2. A ($4,000) advantage. (correct answer)
  3. A ($44,000) advantage.
  4. A ($4,000) disadvantage.
Explanation: This decision must include the opportunity cost of using the catalytic cracker.\nIncremental Revenue: 80,000 gal ×\times (($2.80) - ($2.00)) = 80,000 ×\times ($0.80) = ($64,000).\nIncremental Operating Cost: 80,000 gal ×\times ($0.50) = ($40,000).\nOpportunity Cost: The foregone contribution margin from specialty chemicals is ($20,000).\nTotal Incremental Cost: ($40,000) (operating) + ($20,000) (opportunity) = ($60,000).\nNet Financial Advantage: ($64,000) - ($60,000) = ($4,000).

Question 5

PharmaCo produces a chemical base that can be sold for ($40) per liter at split-off or processed into a drug, 'Healin,' which sells for ($75) per liter. The further processing currently costs ($42) per liter, making the venture unprofitable. The company is negotiating with a new supplier to reduce processing costs. By how much must the further processing cost per liter decrease for the decision to process further to achieve a target profit margin of 10% on the incremental revenue?

  1. ($7.00)
  2. ($3.50)
  3. ($10.50) (correct answer)
  4. ($31.50)
Explanation: This requires a multi-step calculation.\n1. Calculate Incremental Revenue: \75 - $40 = $35perliter.\n2.∗∗CalculateTargetProfit:∗∗10per liter.\n2. **Calculate Target Profit:** 10% of incremental revenue = 0.10\times $35 = $3.50perliter.\n3.∗∗CalculateTargetCost:∗∗IncrementalRevenue−TargetProfit=per liter.\n3. **Calculate Target Cost:** Incremental Revenue - Target Profit =$35 - $3.50 = $31.50perliter.\n4.∗∗CalculateRequiredCostReduction:∗∗CurrentCost−TargetCost=per liter.\n4. **Calculate Required Cost Reduction:** Current Cost - Target Cost =$42 - $31.50 = $10.50$ per liter.

Question 6

A company produces joint product G, which emerges from the split-off point. It can be sold immediately for ($10) per unit. It can also be processed in Department A to become Product GA, which sells for ($25). The processing in Department A costs ($8) per unit. Alternatively, Product GA can be processed further in Department B to become Product GAB, which sells for ($32). The processing in Department B costs ($5) per unit. What is the optimal decision and the total incremental profit per unit compared to selling at the initial split-off point?

  1. Sell as Product GA; incremental profit is ($7).
  2. Sell as Product GAB; incremental profit is ($12).
  3. Sell as Product GA; incremental profit is ($15).
  4. Sell as Product GAB; incremental profit is ($9). (correct answer)
Explanation: This requires two incremental analyses.\n1. Decision: Sell G or process to GA?\n - Incremental Revenue (G to GA): \25 - $10 = $15.\n−IncrementalCost(Dept.A):($8).\n−IncrementalProfit:.\n - Incremental Cost (Dept. A): ($8).\n - Incremental Profit: $15 - $8 = $7.Sincethisispositive,processingtoGAisbetterthansellingG.\n2.∗∗Decision:SellGAorprocesstoGAB?∗∗\n−IncrementalRevenue(GAtoGAB):. Since this is positive, processing to GA is better than selling G.\n2. **Decision: Sell GA or process to GAB?**\n - Incremental Revenue (GA to GAB): $32 - $25 = $7.\n−IncrementalCost(Dept.B):($5).\n−IncrementalProfit:.\n - Incremental Cost (Dept. B): ($5).\n - Incremental Profit: $7 - $5 = $2$. Since this is positive, processing to GAB is better than selling GA.\nOptimal Decision: Process to GAB. The total incremental profit compared to selling G is the sum of the incremental profits from each stage: ($7) (from G to GA) + ($2) (from GA to GAB) = ($9).

Question 7

BioFuel Corp. processes organic waste into Methane (Product M) and Compost (Product C). Last month, the company decided to process all 10,000 pounds of Product M into a refined gas, MethaPlus, based on a projected final selling price of ($4.00) per pound. The decision was financially sound at that time. Before processing began, however, a new competitor entered the market, causing the projected price of MethaPlus to drop to ($3.20) per pound. The split-off selling price of Product M is ($2.00) per pound. The further processing costs, which have not yet been incurred, are ($1.50) per pound. What is the financial consequence of adhering to the original decision to process further given the new market price?

  1. A ($3,000) loss, because the decision should be re-evaluated using current data. (correct answer)
  2. A ($2,000) profit, because the incremental revenue is still positive.
  3. A ($5,000) profit, based on the original price projections used for the decision.
  4. A ($12,000) profit, representing the new total revenue minus only the further processing costs.
Explanation: Further processing decisions should always be based on expected future revenues and costs from the decision point forward. The original price is now a historical artifact; the decision must be re-evaluated with the new price.\nNew Incremental Revenue: 10,000 lbs ×\times (($3.20) - ($2.00)) = 10,000 ×\times ($1.20) = ($12,000).\nIncremental Costs (not yet incurred): 10,000 lbs ×\times ($1.50) = ($15,000).\nFinancial Consequence: ($12,000) - ($15,000) = (($3,000)) loss. The company should reverse its decision and sell at split-off.

Question 8

A food processing company produces 2,000 pounds of apple cores as a joint product from its pie-filling line. The cores can be sold as-is for ($0.20) per pound. They can be processed further into apple pectin for a total variable cost of ($500) and a total avoidable fixed cost of ($100). The further processing has a 10% yield loss, meaning for every 10 pounds of cores processed, 9 pounds of pectin are produced. Pectin sells for ($0.80) per pound. What is the net advantage or disadvantage of processing the apple cores into pectin?

  1. A ($440) advantage. (correct answer)
  2. A ($1,000) advantage.
  3. A ($400) disadvantage.
  4. A ($840) advantage.
Explanation: The yield loss must be accounted for in the incremental revenue calculation.\n1. Revenue at split-off (benchmark): 2,000 lbs ×\times ($0.20) = ($400).\n2. Final output of pectin: 2,000 lbs ×\times 90% = 1,800 lbs.\n3. Revenue after further processing: 1,800 lbs ×\times ($0.80) = ($1,440).
  1. Incremental Revenue: ($1,440) - ($400) = ($1,040).
  2. Incremental Costs: ($500) (variable) + ($100) (avoidable fixed) = ($600).
  3. Net Advantage: ($1,040) - ($600) = ($440).

Question 9

A firm produces a joint product that can be sold for ($30) per unit at split-off or processed further into a premium version for an additional cost of ($12) per unit. The premium version sells for ($40) per unit. Management determines that further processing is not financially viable. However, a marketing consultant suggests that launching the premium version, even at a small loss, would enhance the company's brand image and allow it to enter a new, high-growth market segment. Which of the following statements is the most appropriate evaluation of this situation?

  1. The consultant's suggestion should be ignored because quantitative financial data should be the only factor in such decisions.
  2. The decision should be based solely on the incremental loss of ($2) per unit (($10) incremental revenue - ($12) incremental cost).
  3. Qualitative factors, such as market entry and brand image, can be valid reasons to proceed with a financially unfavorable option if the long-term strategic benefits are expected to outweigh the short-term loss. (correct answer)
  4. The company should process further only if the further processing costs can be reduced to match the incremental revenue of ($10) per unit.
Explanation: While the quantitative analysis shows an incremental loss of ($2) per unit (($40) - ($30) - ($12)), business decisions are not made in a vacuum. Strategic, qualitative factors are also important. If the long-term benefits of entering a new market or enhancing the brand are significant, they may justify accepting a short-term operational loss. This is a common consideration in strategic cost management. The other options represent an overly narrow, purely quantitative view.

Question 10

Island Extracts produces two oils, Palm and Kernel, from a joint process. Kernel oil can be sold for ($15) per liter or refined in the 'Refiner' facility to create cosmetic-grade oil, which sells for ($22) per liter. The variable cost of refining is ($4) per liter. The Refiner has a monthly capacity to process 20,000 liters. This month, the company has 15,000 liters of Kernel oil to process. The Refiner could also be used to re-process 5,000 liters of spoiled Palm oil from a previous batch, which would make it saleable for ($30,000). Without re-processing, the spoiled Palm oil must be discarded at zero value. What is the financial advantage of using the Refiner to process the 15,000 liters of Kernel oil?

  1. ($45,000) advantage.
  2. ($75,000) advantage.
  3. ($30,000) advantage.
  4. ($15,000) advantage. (correct answer)
Explanation: This decision involves an opportunity cost. The Refiner has enough capacity for both tasks (15,000 liters for Kernel + 5,000 liters for Palm = 20,000 liters total capacity), but the question asks for the financial advantage of processing the Kernel oil. This implies a choice. Let's assume the use of the Refiner for Kernel oil precludes its use for Palm oil. The benefit from salvaging the Palm oil is an opportunity cost.\nIncremental Profit from Kernel Oil (before opportunity cost):\n- Incremental Revenue: 15,000 L ×\times (($22) - ($15)) = 15,000 L ×\times ($7) = ($105,000).\n- Incremental Cost: 15,000 L ×\times ($4) = ($60,000).\n- Incremental Profit: ($105,000) - ($60,000) = ($45,000).\nOpportunity Cost: By using the Refiner for Kernel oil, the company forgoes the ($30,000) it could have made by salvaging the Palm oil. This is a relevant cost.\nNet Financial Advantage: ($45,000) (Incremental Profit) - ($30,000) (Opportunity Cost) = ($15,000).

Question 11

BioGen Inc. makes products Alpha and Beta from a joint process. Beta can be sold for ($25) per unit at split-off or processed into Beta-Plus. For each unit of Beta processed, the company incurs ($8) of variable costs and must use 0.5 hours of specialized equipment time. Beta-Plus sells for ($40) per unit. The equipment has a capacity of 1,000 hours per month and no alternative use. The company produces 2,500 units of Beta per month. What is the maximum monthly fee BioGen should be willing to pay to rent additional equipment to process all units of Beta?

  1. ($17,500)
  2. ($2,500)
  3. ($7,000)
  4. ($3,500) (correct answer)
Explanation: First, determine the incremental benefit of processing Beta further. Then, determine the capacity shortfall and calculate the total benefit from overcoming that shortfall.
  1. Incremental profit per unit of Beta: (($40) - ($25)) - ($8) = ($15) - ($8) = ($7).
  2. Total hours required: 2,500 units ×\times 0.5 hours/unit = 1,250 hours.
  3. Hours available: 1,000 hours.
  4. Hours shortfall: 1,250 - 1,000 = 250 hours.
  5. Units that cannot be processed with current capacity: 250 hours / 0.5 hours/unit = 500 units.
  6. Maximum rental fee: The most the company would pay is the total profit it would gain from processing these additional units. 500 units ×\times ($7)/unit = ($3,500).

Question 12

ChemCo produces two products, Alpha and Beta, from a common process with joint costs of ($100,000). Alpha can be sold at the split-off point for ($8.00) per unit or processed further into Super-Alpha at an additional variable cost of ($3.00) per unit. The further processing also requires a ($5,000) equipment setup cost that is avoidable if Alpha is not processed further. Super-Alpha sells for ($14.00) per unit. ChemCo produces 10,000 units of Alpha. The ($100,000) joint cost is allocated ($60,000) to Alpha. What is the financial advantage or disadvantage of processing Alpha into Super-Alpha?

  1. A ($25,000) advantage. (correct answer)
  2. A ($30,000) advantage.
  3. A ($35,000) disadvantage.
  4. A ($5,000) disadvantage.
Explanation: The decision to process further should be based on comparing incremental revenues and incremental costs. Joint costs are sunk costs and irrelevant to this decision.\nIncremental Revenue = (Final Sales Price - Split-off Sales Price) ×\times Units = (($14.00) - ($8.00)) ×\times 10,000 = ($60,000).\nIncremental Costs = (Variable Processing Cost ×\times Units) + Avoidable Fixed Cost = (($3.00) ×\times 10,000) + ($5,000) = ($35,000).\nNet Financial Advantage = Incremental Revenue - Incremental Costs = ($60,000) - ($35,000) = ($25,000).

Question 13

A company is considering further processing 1,000 units of Product Z. The incremental revenue from this processing would be ($15,000). Further processing costs consist of ($5) per unit in direct materials, ($3) per unit in variable overhead, and ($6,000) in total monthly fixed costs for the department. If the process is undertaken, a new supervisor must be hired at a salary of ($4,000) per month. The remaining ($2,000) of fixed costs is depreciation on equipment that has no alternative use or resale value. What is the expected incremental profit or loss from this decision?

  1. A ($3,000) profit. (correct answer)
  2. A ($1,000) profit.
  3. A ($7,000) profit.
  4. A ($5,000) profit.
Explanation: Only avoidable, incremental costs are relevant. The depreciation is a sunk cost and is not relevant.\nIncremental Revenue: ($15,000).\nIncremental Costs:\n- Direct Materials: 1,000 units ×\times ($5) = ($5,000).\n- Variable Overhead: 1,000 units ×\times ($3) = ($3,000).\n- Avoidable Fixed Cost (Supervisor): ($4,000).\n- Total Incremental Costs: \5,000 + $3,000 + $4,000 = $12,000$.\nIncremental Profit: ($15,000) - ($12,000) = ($3,000).

Question 14

WoodPro Inc. produces sawdust that can be sold at split-off for ($10) per ton or processed into wood pellets for an additional cost of ($30) per ton. Wood pellets sell for ($55) per ton. The further processing also yields a resinous by-product, which can be sold for ($5) for every ton of sawdust processed. What is the net financial impact per ton of choosing to process the sawdust into pellets?

  1. A ($15) advantage, as the by-product is incidental and should not be considered in the decision.
  2. A ($20) advantage, because the by-product revenue should be added to the final sales price of the pellets.
  3. A ($20) advantage, because the by-product revenue reduces the cost of further processing. (correct answer)
  4. A ($10) advantage, as the by-product revenue should be netted against the incremental revenue.
Explanation: Revenue from a by-product created during further processing should be treated as a reduction of the further processing costs.\nIncremental Revenue from pellets: ($55) (final price) - ($10) (split-off price) = ($45).\nIncremental Costs: ($30) (processing cost) - ($5) (by-product revenue) = ($25).\nNet Financial Advantage: ($45) - ($25) = ($20) per ton. While choice C arrives at the same number, its reasoning is less precise than B; by-product revenue is conventionally treated as a reduction of cost, not an increase in the main product's price.

Question 15

A company produces joint products R and S. The company has already incurred ($50,000) in joint costs for the current batch. An accountant prepared an analysis showing that processing S further into S-Prime would result in a total profit of ($5,000) for product S-Prime, calculated as: Final Sales Revenue (($80,000)) - Allocated Joint Costs (($30,000)) - Further Processing Costs (($45,000)) = ($5,000). The sales value of S at the split-off point is ($40,000). Based on this information, what is the actual financial advantage or disadvantage of processing S into S-Prime?

  1. A ($5,000) advantage, as calculated by the accountant.
  2. A ($35,000) advantage.
  3. A ($10,000) disadvantage.
  4. A ($5,000) disadvantage. (correct answer)
Explanation: The accountant's analysis incorrectly includes the allocated joint costs, which are sunk and irrelevant to the decision. The correct analysis compares incremental revenue to incremental cost.\nIncremental Revenue: Final Sales Revenue (($80,000)) - Split-off Sales Value (($40,000)) = ($40,000).\nIncremental Cost: Further Processing Costs = ($45,000).\nFinancial Advantage/Disadvantage: ($40,000) - ($45,000) = (($5,000)) disadvantage. The company should sell product S at the split-off point.

Question 16

Deluxe Materials makes two products, Lux and Rex, from a joint process. The company is analyzing its processing decisions for the 10,000 units of Lux and 5,000 units of Rex produced each period. Processing Lux into Lux-Plus yields an incremental profit of ($2) per unit. Processing Rex into Rex-Plus results in an incremental loss of ($1) per unit. A manager, believing in maximizing total output, decides to process both products further. What is the net effect on the company's operating income from this decision compared to making the optimal choices?

  1. A decrease of ($5,000). (correct answer)
  2. An increase of ($15,000).
  3. An increase of ($20,000).
  4. A decrease of ($1,000).
Explanation: The optimal choice is to process further only when there is an incremental profit.\nOptimal Decision: Process Lux (10,000 units ×\times ($2) profit = ($20,000) gain) and sell Rex at split-off (avoiding a ($1) loss per unit). The total gain from the optimal decision is ($20,000).\nManager's Decision: Process both Lux and Rex. The total impact is (10,000 units ×\times ($2) profit) + (5,000 units ×\times ($1) loss) = \20,000 - $5,000 = $15,000$ gain.\nNet Effect: The manager's decision results in an income of ($15,000), whereas the optimal decision would have resulted in an income of ($20,000). The difference is a decrease of ($5,000). This represents the loss incurred by processing Rex.

Question 17

A company produces two joint products, X and Y. A recent analysis shows that processing Product Y further into a new product, Y-Plus, is financially advantageous by ($5) per unit based on current cost and revenue estimates. Which of the following factors, if it became true, would be most likely to reverse this decision?

  1. The joint costs allocated to Product Y are expected to increase by ($6) per unit next year.
  2. The further processing of Y into Y-Plus generates a toxic by-product requiring a previously unbudgeted disposal cost of ($7) per unit. (correct answer)
  3. The market price of Product X, the other joint product, is expected to decrease significantly.
  4. Further processing Y into Y-Plus would utilize factory capacity that is currently idle and has no alternative use.
Explanation: The decision to process further depends on incremental revenues and costs. A new incremental cost that was not part of the initial analysis could reverse the decision. The disposal cost of ($7) per unit is a new incremental cost that outweighs the previously calculated advantage of ($5) per unit. Joint costs (A) are sunk costs and irrelevant. The price of other products (C) is also irrelevant to this specific decision. Idle capacity (D) strengthens the argument to process further as there is no opportunity cost.

Question 18

Delta Manufacturing's joint process creates products R, S, and T. Product S can be sold at split-off for $85,000 or further processed. Further processing requires choosing between two mutually exclusive technologies: Technology 1 costs $32,000 and generates $125,000 revenue, while Technology 2 costs $28,000 and generates $118,000 revenue. However, Technology 1 requires specialized labor that would otherwise be used to generate $12,000 contribution margin in another department. What is the best decision for Product S?

  1. Use Technology 1, as it provides the highest absolute revenue of $125,000
  2. Use Technology 2, as it provides incremental profit of $5,000 compared to Technology 1's loss of $4,000
  3. Sell at split-off, as both technologies result in negative incremental profits when all costs are considered
  4. Use Technology 2, as it provides $9,000 more incremental profit than Technology 1 after considering opportunity costs (correct answer)
Explanation: Technology 1: $125,000 - $85,000 - $32,000 - 12,000(opportunitycost)=−12,000 (opportunity cost) = -4,000. Technology 2: $118,000 - $85,000 - $28,000 = $5,000. Technology 2 provides 5,000−(−5,000 - (-4,000) = $9,000 more incremental profit than Technology 1. Technology 2 is optimal as it generates positive incremental profit while considering all relevant costs including opportunity costs.

Question 19

Vertex Corp.'s joint process yields products M, N, and O. Product N has a split-off value of $120,000 and represents 30% of total joint process output by relative sales value. Product N can be processed further for $45,000 to generate $180,000 in revenue. However, further processing Product N will reduce the split-off value of Product O by $8,000 due to shared equipment usage. What is the net incremental benefit of further processing Product N?

  1. The net incremental benefit is $15,000, considering only Product N's direct costs and revenues
  2. The net incremental benefit is $7,000, accounting for the negative impact on Product O (correct answer)
  3. The net incremental benefit is $23,000, as the impact on Product O is not relevant to this decision
  4. The net incremental benefit is $52,000, representing the total additional revenue less processing costs
Explanation: Direct incremental benefit from Product N: $180,000 - $120,000 - $45,000 = $15,000. However, further processing N reduces O's value by $8,000, which is a relevant cost of the decision. Net incremental benefit = $15,000 - $8,000 = $7,000. Choice A ignores the impact on Product O. Choice C incorrectly dismisses the relevant externality. Choice D incorrectly calculates using only additional revenue minus processing cost.

Question 20

Crimson Corp. allocates $240,000 in joint costs to products X, Y, and Z using relative sales value at split-off. Product Y can be sold for $80,000 at split-off or processed further for $35,000 additional cost to yield $125,000 in revenue. The allocated joint cost for Product Y is $64,000. What decision should Crimson make regarding Product Y?

  1. Process further because incremental profit of $45,000 exceeds the allocated joint cost difference
  2. Sell at split-off because total profit of $16,000 exceeds further processing profit of $10,000
  3. Process further because incremental revenue of $45,000 exceeds incremental costs of $35,000 (correct answer)
  4. Sell at split-off because avoiding $35,000 in processing costs improves overall profitability
Explanation: Joint costs are sunk and irrelevant to the further processing decision. Compare incremental revenue ($125,000 - $80,000 = 45,000)toincrementalcosts(45,000) to incremental costs (35,000). Since incremental revenue exceeds incremental costs by $10,000, further processing is profitable. Choice A incorrectly considers allocated joint costs. Choice B incorrectly compares total profits including sunk costs. Choice D incorrectly focuses on avoiding costs rather than incremental analysis.