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Molo Oil Company produces gasoline, home heating oil, and jet fuel from crude oil in a joint processing operation. Joint processing costs up to the split-off point total $385,000 per month. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows: Product Selling Price Monthly Output Gasoline $ 27.00 per gallon 14,400 gallons Heating Oil $ 21.00 per gallon 22,400 gallons Jet Fuel $ 33.00 per gallon 5,600 gallons Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product Additional Processing Costs Selling Price Gasoline $ 89,220 $ 32.80 per gallon Heating Oil $ 129,170 $ 27.80 per gallon Jet Fuel $ 60,160 $ 41.80 per gallon Required: 1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point

User Marco Burrometo
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Answer:

Molo Oil Company

The financial advantage of further processing of each of the three products beyond the split-off point is:

= $182,430

(which is the additional profit gained from the further processing).

Step-by-step explanation:

Joint processing costs = $385,000 per month

Product Selling Price Monthly Output Sales Value

Gasoline $ 27.00 per gallon 14,400 gallons $388,800 ($27*14,100)

Heating Oil $ 21.00 per gallon 22,400 gallons 470,400 ($21*22,400)

Jet Fuel $ 33.00 per gallon 5,600 gallons 184,800 ($33*5,600)

Total sales value = $1,044,000

Joint costs = 385,000

Profit = $659,000

Allocation of joint processing costs of $385,000

Gasoline = $143,379 ($388,800/$1,044,000 * $385,000)

Heating Oil 173,471 ($470,400/$1,044,000 * $385,000)

Jet Fuel 68,150 ($184,800/$1,044,000 * $385,000)

Total cost $385,000

Total costs:

Additional

Joint Cost Monthly Cost Total Costs

Gasoline $143,379 $29,740 $173,119

Heating Oil 173,471 43,057 216,528

Jet Fuel 68,150 20,053 88,203

Total costs $385,000 $92,850 $477,850

Product Additional Processing Selling Price

Costs (per quarter)

Gasoline $ 89,220 $ 32.80 per gallon

Heating Oil $ 129,170 $ 27.80 per gallon

Jet Fuel $ 60,160 $ 41.80 per gallon

Product Additional Processing Selling Price

Costs (per month)

Gasoline $ 29,740 $ 32.80 per gallon

Heating Oil $ 43,057 $ 27.80 per gallon

Jet Fuel $ 20,053 $ 41.80 per gallon

Determination of profit after further processing:

Product Selling Price Monthly Output Sales Value

Gasoline $ 32.80 per gallon 14,400 gallons $462,480 ($32.80*14,100)

Heating Oil $ 27.80 per gallon 22,400 gallons 622,720 $27.80*22,400)

Jet Fuel $ 41.80 per gallon 5,600 gallons 234,080 ($41.80*5,600)

Total sales revenue = $1,319,280

Total costs = 477,850

Profit = $841,430

Financial advantage

Profit after further processing = $841,430

Profit with Joint processing = 659,000

Financial advantage = $182,430

User Adrian Bob
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