Question

Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $43 to buy from farmers and $11 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $25 or processed further for $16 to make the cocktail of nutrients that are sold for $45. The depeeled spuds can be sold as is for $36 or processed further for $25 to make frozen french fries that are sold for $57.

a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries?

Profit / loss - how many?

b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product?

Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? (Negative amounts should be indicated by a minus sign.)

	Cocktail of Organic Nutrients	Frozen French Fries
Financial advantage (disadvantage) from further processing
Sold as is or processed further?

Answer 1

a.

Total sales ($45 + $57)	102
Less: Costs
Cost of potatoes	43
Cost of peeling	11
Further processing - peels	16
Further processing - depeeled spuds	25
Total costs $	95
Profit $	7

b.

	Cocktail of Organic Nutrients	Frozen French Fries
Sales value after further processing	45	57
Less: Sales value at split-off	25	36
Incremental sales revenue $	20	21
Less: Costs of further processing	16	25
Financial advantage (disadvantage) from further processing $	4	-4
Sold as is or processed further?	Processed further	Sold as is