Corporation produces two intermediate products, A and B, from a common input. In

Question

Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64. Required: a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work!

Explanation / Answer

Product X = 32 (Final Sales Value) - 21 (Sales Value at Split Off) = 11 (Incremental revenue from further processing) =11-14 (Cost of Processing) = 3 (Loss from further processing) Product Y = 64 (Final Sales Value) - 44 (Sales Value at Split Off) = 20 (Incremental revenue from further processing) =20-28 (Cost of Processing) = 8 (Loss from further processing) Since both the products are results in loss in case of further processing, none of the products should be processed further.

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