|Product A||Product B||Product C|
|Selling Price after further processing (a)||$ 5||$ 7||$ 10|
|Selling Price at split off point (b)||3||$ 4||$ 8|
|Incremental revenue per pound or gallon (c) = (a) - (b)||2||$ 3||$ 2|
|Total quarterly output in pounds or gallons (d)||17,000||22,000||8,000|
|Total incremental revenue (e) = (d) x (c)||34,000||66,000||16,000|
|Total incremental processing costs (f)||43,000||39,000||12,750|
|Total incremental profit or ( loss ) (e) - (f)||$ (9,000)||27,000||3,250|
The incremental profit shows the additional profit earned by further processing the product instead of selling the product at split off point. This profit arises because the additional costs incurred to further process it is less than the increase in revenue earned by selling it after further processing.
Since there is an incremental loss in product A we should not further process it while product B and C show incremental profits so we should further process these products..