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1A: Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $315,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	13.00	per pound		11,600	pounds
B	$	7.00	per pound		18,200	pounds
C	$	19.00	per gallon		2,800	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	54,640	$	17.40	per pound
B	$	77,580	$	12.40	per pound
C	$	29,360	$	26.40	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

1B: Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companys performance, the company is thinking about dropping several flights that appear to be unprofitable.

A typical income statement for one round-trip of one such flight (flight 482) is as follows:

Ticket revenue (165 seats 40% occupancy $210 ticket price)	$	13,860			100.0	%
Variable expenses ($15.00 per person)		990			7.1
Contribution margin		12,870			92.9	%
Flight expenses:
Salaries, flight crew	$	1,800
Flight promotion		770
Depreciation of aircraft		1,500
Fuel for aircraft		5,500
Liability insurance		4,500
Salaries, flight assistants		1,500
Baggage loading and flight preparation		1,850
Overnight costs for flight crew and assistants at destination		500
Total flight expenses		17,920
Net operating loss	$	(5,050	)

The following additional information is available about flight 482:

a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete.

b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a high-risk area. The remaining two-thirds would be unaffected by a decision to drop flight 482.

c. The baggage loading and flight preparation expense is an allocation of ground crews salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the companys total baggage loading and flight preparation expenses.

d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.

e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

Required:

1. What is the financial advantage (disadvantage) of discontinuing flight 482?

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