Question

Hommie Delicacies produces two products (Orapine and Banango) from a joint process. The joint cost of production is GH¢80,000. Five thousand units of Orapine can be sold at split-off for GH¢20 per unit or processed further at an additional cost of GH¢20,000 and sold for GH¢25 per unit. Ten thousand units of Banango can be sold at split-off for GH¢15 per unit or processed further at an additional cost of GH¢20,000 and sold for GH¢16 per unit. Advise Hommie on further processing each of the products?

Answer 1

• Orapine: do additional processing
• Banango: no additional processing

Explanation:

The processing cost of split-off Orapine units is ...

GH¢20,000/(5000 units) = GH¢4/unit

The increase in revenue from the further processing is ...

GH¢25 -GH¢20 = GH¢5

The increased processing cost is less than the increased revenue, so there is additional profit from further processing 5000 units.

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The processing cost of split-off Banango units is ...

GH¢20,000/(10000 units) = GH¢2/unit

The increase in revenue from the further processing is ...

GH¢16 -GH¢15 = GH¢1

The increased processing cost is more than the increased revenue, so the company takes a loss from further processing 10000 units. No additional processing of Banango units should be undertaken.