Hello, I have this question that I would like some help with as I don\'t know ho

Question

Hello, I have this question that I would like some help with as I don't know how to solve it please. Thank you!

Smith Ltd. specialised in processing various categories of pork product. Its plants, located in Auckland, produce several products from a common process: sirloin roast, chops, spare ribs and the residual. The roasts, chops and spare ribs are packaged, branded, and sold to supermarkets. The residual consists of organ meats and leftover pieces that are sold to sausage and hot dog processors. The joints production costs for a typical week are as follows:

Direct materials $84,500

Direct labour 29,000

Overhead 20,000

The sales revenues from each product are as follows: sirloin roasts, $68,000; chops, $71,000; spare ribs, $33,000; and residual $9,800.

Smith Ltd.’s management has learned that certain organ meats are a prized delicacy in overseas markets. They are considering separating those from the residual and selling them abroad for a standardised value of $52,000. This would bring the sales of the residual down to a value of $2,650. In addition, the organ meats would need to be packaged and then air freighted to overseas. Further processing cost per week is estimated to $27,500. Transportation costs would be $12,100 per week. Finally resource spending would need to be expanded for other activities, such as purchasing, receiving and internal shipping. The increase in resource spending for these activities is estimated to $3,120 per week.

i) Calculate the gross profit earned by the original mix of products for one week of production in Smith Ltd.?

ii) Based solely on financial grounds, should the company separate the organ meats from the residual for shipping overseas or continue to sell the residual at split-off? Justify your answer with supportive calculations by considering only the incremental costs and revenues of the decision.

iii) Based on the decision you made in requirement ii), explain what is the effect of your decision on weekly gross profit for Smith Ltd.? Justify your answer with supportive calculations.

Explanation / Answer

Smith Ltd i Gross Profit Calculation for the week Oroginal Mix Details Amt $/week Sales Revenue           181,800 Less Joint Production costs/week Direct Materials              84,500 Direct Labor              29,000 Overhead              20,000 Total Joint Cost           133,500 Gross Profit per week              48,300 ii/III Analysis of Further processing cost /revenue Sell at Split off point $ Further processing $ Incremental Income/Cost Sales Revenue Sales Revenue           181,800           226,650              44,850 Less Joint Production costs/week Direct Materials              84,500             84,500 Direct Labor              29,000             29,000 Overhead              20,000             20,000 Further processing cost             27,500            (27,500) Additional Freight Cost               12,100            (12,100) Total Cost             133,500           173,100            (39,600) Gross Profit per week              48,300             53,550                 5,250 Less Additional resources per week -3120 Net Increase in Goss profit 2130 As there is additional incremental gross profit, further processing after split off should be done. Weekly gross profit will increase by $2130

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