Sell or Process Further Port Allen Chemical Company processes raw material D int

Question

Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $6 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $6 per liter or processed further into Product G at an additional cost of $5 per liter. Product G can then be sold for $13 per liter.

Determine whether Product F should be sold or processed further into Product G. Calculate the net benefit (cost) of further processing

Explanation / Answer

Product F selling price at split off - $6 per liter

Qty in Litres- 40 litres

If processing further - $ 5 per liter

Incremental Approach

Incremental Revenue - ($13 - $6) - $7 per liter

Incremental Cost - $5 per liter

Increase in profits due to further processing is $2 per liter. Hence it is beneficial to process further into Product G.

Since the incremental revenue is more than the incremental cost of further processing, it is not relevant to see the cost incurred till the split off stage since this $2 is an incremental benefit.

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