Question

arrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into Product X. Intermediate product B can be further processed into Product Y. The common input is purchased in batches that cost $90 each and the cost of processing a batch to produce intermediate products A and B is $36. Intermediate product A can be sold as is for $53 or processed further for $33 to make Product X that is sold for $80. Intermediate product B can be sold as is for $113 or processed further for $66 to make Product Y that is sold for $160. Required: a. Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss) from processing one batch of the common input into the products X and Y

Answer 1

if the firm processes A and B into X and Y, it will lose $25

Step-by-step explanation:

total costs of producing product A and B = $90 (common input) + $36 (processing) = $126

selling price of A and B = $53 + $113 = $166

profit of selling A and B = $166 - $126 = $40

if A and B are processed further, the cost of X and Y = $126 + $33 + $66 = $225

selling price of X and Y = $80 + $160 = $240

profit of selling X and Y = $240 - $225 = $15

if the firm processes A and B into X and Y, it will lose $40 - $15 = $25