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: b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain.

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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