A price of $4.50 per unit after further processing would not be adequate, because it would cause a reduction in total profits.
Joint costs are irrelevant to the decision. A price of $3.00 per unit after further processing would not be adequate, because it would cause a reduction in total profits.
Joint costs prior to the split-off are not relevant to the decision as to whether to process further or sell at the split-off, because they will be the same regardless of which choice Whitehall makes. We know that AM-12 can be sold for $3.50 per unit at the split-off. Further processing will cost $90,000 for 60,000 units, so the additional cost per unit for the additional processing would be $1.50 ($90,000 ÷ 60,000 units of AM-12). Therefore, the minimum price that Whitehall would accept must be a price greater than $5.00 per unit ($3.50 + $1.50). Why would a price greater than $5.00 per unit be more advantageous than a price greater than $5.25 per unit, as suggested by another answer choice? If Whitehall could get $5.25 per unit, that would increase its gross profit by more than if it could get $5.01 per unit, certainly. However, if Whitehall refuses to accept a price between $5.01 and $5.24 for the further-processed AM-12, it could price itself out of the market. Flank Corporation might decide it would not pay that much and might walk away from the deal, leaving Whitehall to sell the AM-12 without further processing for $3.50. Any price of $5.01 or greater would be advantageous to Whitehall because it would increase gross profits for the company as a whole. Revenue would increase by a minimum of $1.51 per unit sold ($5.01 ? $3.50), while cost of goods sold expense would increase by $1.50 per unit sold. Thus, gross profit for the company would increase by a minimum of $.01 per unit sold, or by at least $600 (60,000 units × $.01). On the other hand, requiring a price of $5.25 per unit could cause the opportunity — and the additional gross profit — to evaporate.
If Whitehall processes the AM-12 further, cost of goods sold expense per unit will increase by $1.50 for the AM-12 ($90,000 ÷ 60,000 units). Thus, any price of $5.01 or greater ($3.50 + $1.50 + $.01) for the further-processed AM-12 would be advantageous to Whitehall because it would increase gross profits for the company as a whole. Revenue would increase by a minimum of $1.51 per unit sold ($5.01 ? $3.50), while cost of goods sold expense would increase by $1.50 per unit sold. Thus, gross profit for the company would increase by a minimum of $.01 per unit sold, or by at least $600 (60,000 units × $.01). Therefore, the statement that this would maintain the same gross profit percentage is not accurate, because the gross profit percentage for the company as a whole would increase, not remain the same. If Whitehall could get $5.25 per unit, that would increase its gross profit by more than if it could get $5.01 per unit, certainly. However, if Whitehall refuses to accept a price between $5.01 and $5.24 for the further-processed AM-12, it could price itself out of the market. Flank Corporation might decide it would not pay that much and might walk away from the deal, leaving Whitehall to sell the AM-12 without further processing — and without any additional gross profit — for $3.50.
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