Question

Farrugia 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 $27 each and the cost of processing a batch to produce intermediate products A and B is $11. Intermediate product A can be sold as is for $16 or processed further for $10 to make Product X that is sold for $24. Intermediate product B can be sold as is for $34 or processed further for $20 to make Product Y that is sold for $48.

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?

b. What is the Financial advantage (disadvantage) from further processing? Should each of the intermediate products, A and B, be sold as is or processed further?

Answer 1

Answer a.

Total revenue generated from the end products X and Y ($24 + $48)		$72
Less: Total cost involved in making the finished product
Cost of common input	27
Cost of processing a batch	11
Cost of further processing product A	10
Cost of further processing product B	20	$68
Profit (loss) from processing one batch		$4

Answer b.

	Product X	Product Y
Final sales value after further processing	24	48
Less: Sales value at split-off point	16	34
Incremental revenue from further processing	8	14
Less: Cost of further processing	10	20
Profit / (loss) from further processing $	-2	-6
Decession	Sell as is without further processing	Sell as is without further processing

So Financial disadvantage from final processing