Center Company currently produces three products from a joint process. The joint

Question

Center Company currently produces three products from a joint process. The joint process has total costs of $512,000 per month. All three products, A, B & C, are immediately saleable as they come out of the joint process. Alternatively, any of the products could continue on with additional processing and be sold as a more complete product. The following information is available:

   

a-1. Should Product A be sold immediately or sold after processing further?

a-2. How much will the decision affect profit?



b-1. Should Product B be sold immediately or sold after processing further?

  

b-2. How much will the decision affect profit?



c-1. Should Product C be sold immediately or sold after processing further?

c-2. How much will the decision affect profit?

Units Immediate Sales Price Later Sales Price Unit Cost of Further Processing A 4,400 $ 15 $ 16 $ 2.00 B 17,900 $ 21 $ 24 $ 2.50 C 10,400 $ 24 $ 31 $ 3.00

Explanation / Answer

a-1 Sell Now Because, the later selling will only give $1 increase in Selling price, while it has a cost of $2 for the further process So, it will decrease the profit of the company by $1 per Unit a-2 It will reduce profit by $ 4,400 ($1 * 4,400 units) Units Immediate sale price Later slae price Further cost per unit Profit (Loss)          4,400 $                             15.00 $                 16.00 $                              2.00 $          (1.00) So, Total of Immediate Sale Price + Further Cost = $15 + $2 = $17 Later Sale Price = $16 Difference = $17 - $16 = $1 Here the later sale price is less compared to Immediate price + further cost It will bring a short of $1 in Later sale Price (or $1 more cost) b-1 Sell Later Because, the later selling will give $3 increase in Selling price, while it has only cost of $2.5 for the further process So, it will increase the profit of the company by $0.5 per Unit b-2 It will increase profit by $ 8,950 ($0.5 * 17,900 units) Units Immediate sale price Later slae price Further cost per unit Profit       17,900 $                             21.00 $                 24.00 $                              2.50 $            0.05 So, Total of Immediate Sale Price + Further Cost = $21 + $2.5 = $23.5 Later Sale Price = $24 Difference = $24 - $23.5 = $0.5 Here the later sale price is more compared to Immediate price + further cost It will bring an increase of $0.5 in Later sale Price (or $0.5 less cost) c-1 Sell Later Because, the later selling will give $7 increase in Selling price, while it has only cost of $3 for the further process So, it will increase the profit of the company by $4 per Unit c-2 It will increase profit by $ 41,600 ($4 * 10,400 units) Units Immediate sale price Later slae price Further cost per unit Profit       10,400 $                             24.00 $                 31.00 $                              3.00 $            4.00 So, Total of Immediate Sale Price + Further Cost = $24 + $3 = $27 Later Sale Price = $31 Difference = $31 - $27 = $4 Here the later sale price is more compared to Immediate price + further cost It will bring an increase of $4 in Later sale Price (or $4 less cost)

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