This seems like a difficult question, but it really is not. All of the information about the joint costs and their allocation is irrelevant. The only thing we need to determine is how much income would increase if the Xylo is processed further into Zinten instead of being sold as Xylo without further processing. Therefore, this is a sell or process further decision, and the only amounts that are relevant are the price Xylo sells for per pound, the price Zinten would sell for per pound, and the additional cost to process Xylo into Zinten. Xylo sells for $12 per pound, and 2,000 pounds are manufactured in each batch, so total revenue for Xylo would be $12 × 2,000, or $24,000. Total cost for Xylo at this point is irrelevant, because it will be the same whether Xylo is processed further or not processed further. If Xylo is processed further into Zinten, total revenue for Zinten would be $15 × 2,000, or $30,000. The additional cost to process further is $4,000. Therefore, the difference in net income per batch if Zinten is manufactured instead of selling the product as Xylo is ($30,000 ? $4,000) ? $24,000, or $26,000 ? $24,000, which is $2,000 per batch.
$26,000 per batch produced is the revenue of $30,000 from selling 2,000 pounds of Zinten minus the $4,000 it would cost to process the Xylo into Zinten. This does not take into account the revenue that would be earned by selling the product as Xylo without further processing.
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This answer results from summing the separable cost of Xylo ($12,000) and the additional cost to process Xylo into Zinten ($4,000) and dividing the result by the number of pounds of Zinten produced (assumed to be 2,000, the same as the number of pounds of Xylo) to get a cost per pound of $8. Then the selling price of Zinten ($15 per pound) minus the $8 cost per pound is multiplied by 2,000 pounds to equal $14,000. This is incorrect because (1) the separable cost of Xylo ($12,000) used in calculating this incorrect answer is irrelevant to the decision because that same cost will be incurred regardless of the decision made; and (2) the revenue from producing and selling Xylo ($12 × 2,000) is not used in calculating this incorrect answer. The revenue from Xylo is needed because the question is asking how much net income would increase if Zinten is produced and sold instead of Xylo. To calculate an amount of change, we must compare the new amount with the old amount.
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