help me with bec question

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  • #199307
    rsiddiqui
    Participant

    Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.

    Concerning AM-12, which one of the following alternatives is most advantageous?

    My question is why do you include joint cost in this when I thought joint cost wasn’t relevant for marginal analysis (specifically Selling or processing?). How does someone go about solving this?

    rsiddiqui
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  • #753406
    numberJ
    Participant

    I think what this problem is asking you to do is compare the incremental revenue to the incremental costs of additional processing (which as you mentioned ignores earlier joint costs / sunk costs). Per this example, it appears there is $0 incremental revenue and $90k incremental cost so it would not be beneficial to proceed with the additional processing. (I am gathering from the information the the selling price will be $3.50 before and $3.50 after additional processing = $0 incremental revenue.)

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