Sell or Process Further Decisions Joint products have common processes and costs

Question

Sell or Process Further Decisions

Joint products have common processes and costs of production up to a split-off point. At that point, they become distinguishable. For example, certain minerals such as copper and gold may both be found in a given ore. The ore must be mined, crushed, and treated before the copper and gold are separated. The point of separation is called the split-off point. The costs of mining, crushing, and treatment are common to both products.

Often, joint products are sold at the split-off point. But sometimes, it is more profitable to process a joint product beyond the split-off point prior to selling it. The key point is that all of the joint production costs are irrelevant to the sell or process further decision. By the time the split-off point is reached, all joint costs are sunk, and therefore, irrelevant. The only relevant costs are those incurred beyond the split-off point.

Example: Enviro-Chem Company processes a number of chemical compounds used in producing reagents for the environmental testing industry. One compound is decomposed into two chemicals: guarine and petroline. The cost of processing one batch of compound is $75,400, and the result is 4,340 gallons of guarine and 8,180 gallons of petroline. Enviro-Chem Company can sell the guarine at split-off for $13 per gallon and the petroline for $9 per gallon. Alternatively, the guarine can be processed further at a cost of $6 per gallon (of guarine) into rhydrolite. It takes 4 gallons of guarine for every gallon of rhydrolite. A gallon of rhydrolite sells for $74. If the guarine is sold at split-off, Enviro-Chem will earn sales revenue on guarine of $ . If the guarine is processed further into rhydrolite, Enviro-Chem will earn a net post-split-off amount of $ . It is better for Enviro-Chem Company to - Select your answer -sell the guarine at split-offprocess guarine further into rhydroliteItem 3 .

Explanation / Answer

Guarine Petroline Cost Gallons 4,340 8,180 12,520 cost of processing 26,137 49,263 75,400 Cost per unit of gallons 6 6 12 sell per gallon 13 9 22 Profit per gallon 7 3 10 A cost of processing Total cost x guarine gallons / Total gallons B cost per unit of gallons cost of processing / guarin gallons Guarine Petroline Cost Gallons 4,340 8,180 12,520 cost of processing 26,137 49,263 75,400 Cost per unit of gallons 6 6 12 processed further at a cost 6 4 10 Total cost 12 10 22 sell per gallon 74 74 148 Profit per gallon 62 64 126

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