Question

Bowdish 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 $44 to buy from farmers and $12 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $26 or processed further for $17 to make the cocktail of nutrients that are sold for $46. The depeeled spuds can be sold as is for $37 or processed further for $26 to make frozen french fries that are sold for $58.

Required:

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? (Input the amount as a positive value.)

b.

Should each of the intermediate products, peels and depeeled spuds, be processed further into an end product? (Loss amounts should be indicated with a minus sign..)

	cocktail of organic nutrients	frozen french fries
incremental profit (loss) from further processing

	yes or no
cocktail of organic nutrients
frozen french fries

Answer 1

SOLUTION

(A) Analysis of the profitability of the overall operation:

Particulars	Amount ($)
Combined final sales value ($46 + $58)	104
Less: Costs of producing the end products:
Cost of potatoes $44
Cost of peeling $12
Cost of further processing peels $17
Cost of further processing depeeled spuds $26
Total	99
Profit (loss)	5

(B) Analysis of sell or process further:

	Cocktail of Organic Nutrients	Frozen French Fries
Final sales value after further processing	46	58
Less: Sales value at split-off point	(26)	(44)
Incremental revenue from further processing	20	14
Less: Cost of further processing	(17)	(26)
Profit (loss) from further processing	3	(12)