Joint Cost The Sun-Kissed Company manufactures two skin-care lotions, Soft Skin
ID: 342005 • Letter: J
Question
Joint Cost The Sun-Kissed Company manufactures two skin-care lotions, Soft Skin and Silken Skin, out of a joint process. The joint (common) costs incurred are $420,000 for a standard production run that generates 180,000 gallons of Soft Skin and 120,000 gallons of Silken Skin. Additional processing costs beyond the split-off point are $1.40 per gallon for Soft Skin and $0.90 per gallon for Silken Skin. Soft Skin sells for $2.40 per gallon while Silken Skin sells for $3.90 per gallon The Best Eastern Hotel chain has asked the Sun-Kissed Company to supply it with 240,000 gallons of Silken Skin at a price of $3.65 per gallon. Best Eastern plans to have the Silken Skin bottled in 1.5-ounce personal- use containers that are supplied in each of its hotel rooms as part of the complimentary personal products for guest use If Sun-Kissed accepts the order, it will save $0.05 per gallon in packaging of Silken Skin. There is sufficient excess capacity in Sun-Kissed's production system to handle just one more production run in order to have sufficient Silken Skin for this special order. However, the nature of the joint process always results in 180,000 gallons of Soft Skin and 120,000 gallons of Silken Skin. Also, the market for Soft Skin is saturated; hence, any additional sales of Soft Skin would take place at a price of $1.60 per gallon a. What is the profit normally earned on one production run of Soft Skin and Silken Skin? Do not use negative signs with your answers Profit from one production run Soft skin Silken skirn Total contribution margin Join production costs Total profitExplanation / Answer
Given Data
Sale Price Soft Skin PG = $2.40
Sale Price Silken Skin PG = $3.90
Separate process cost for soft skin PG = $1.40
Separate process cost for silken skin PG = $0.90
Joint cost per production run = $420000
Composition of production run = 180000 PG soft skin + 120000 PG of Silken Skin
Sale price of soft skin in increased order = $1.60 PG
Sale price of silken skin in increased order = $3.65 PG
Decrease separate cost PG for silken skin in increased order = 0.90 - 0.05 =$0.85
No. of production run required for increases production = 02 Nos.
Calculation (A)
Profit from one production run
Calculation (B) Additional Contribution Margin
(3.65 - 0.85) x (120000 x 2) = $672000
(3.90 - 0.90) x (120000 x 2) - 672000
=720000 - 672000
= $48000
So as from calculation profit from one production run is $120000 and from increase two addition run to accomplish the special order is $ (-) 144000 (loss).
So it is not profitable for the company to accept the order from best eastern hotel.
Soft Skin (A) 180000 (2.40 - 1.40) x 180000 = 180000 Silken Skin (B) 360000 (3.90 - 0.90) x 120000 = 360000 Total Contribution Margin (C) 540000 (A+B) Joint Production Cost (D) 420000 Given Data Total Profit(E) 120000 (C-D)Related Questions
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