Question

Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $4 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 $4 per liter or processed further into Product G at an additional cost of $3 per liter. Product G can then be sold for $9 per liter.

a. Determine whether Product F should be sold or processed further into Product G.
b. Calculate the net advantage (disadvantage) of further processing.
c. Use a negative sign with your answer to indicate a net disadvantage (if applicable).

Answer 1

a) Product G should be produced and sold

b) Net financial advantage $80

Step-by-step explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.

Also note that all cost incurred up to the split-off point are irrelevant to the decision to process further .

$

Revenue after split-off point

($9× 40 litres) 360

Revenue at the slit of point

($4 × 40) (160)

Additional income from further processing 200

Further processing cost ($3× 40) (120)

Incremental income from further processing 80

Incremental income from further processing = $80

a) The product F should be processed further and sold as product G. Doing so would increase the net income by $80.

b) Net advantage $80