Question

Tommy Tomato, Incorporated (TTI) sells organic canned tomato sauces. TTI spends $50,000 purchasing, cutting, washing, grinding, and straining tomatoes into 100,000 liters of plain tomato sauce ($0.50 per liter).

At this point, TTI has two choices: a) sell the plain tomato sauce for $2 per liter; or b.) take the 100,000 liters of plain tomato sauce and process them further into a gourmet seasoned pizza sauce that can be sold for $3.10 per liter. The extra seasoning and processing required to convert the plain tomato sauce into gourmet pizza sauce costs TTI $0.75 per liter.

TTI can choose to sell the plain tomato sauce as-is at the "split-off point" or decide to process the sauce further into the gourmet sauce.

1.  If TTI sells the 100,000 liters of gourmet pizza sauce, how much sales revenue will TTI generate?

2. If TTI decides to simply sell the 100,000 liters of plain tomoato sauce without processing it any further, how much sales revenue would TTI generate instead?

3. How much additional revenue would TTI receive by selling the gourmet pizza sauce instead of the plain tomato sauce?

4. How much did it cost TTI to convert the 100,000 liters of plain tomato sauce into gourmet pizza sauce?

5. What is the financial advantage (disadvantage) of selling the gourmet pizza sauce instead of the plain pizza sauce?

6. Should TTI sell the plain tomato sauce or the gourmet pizza sauce?

7. If the seasoning and extra processing to covert the plain sauce into gourmet pizza sauce cost TTI $1.25 per liter instead of $0.75 per liter, what would be the financial advantage (disadvantage) of selling the gourmet pizza sauce instead of the plain pizza sauce?

Answer 1

1.If TTI sells the 100,000 litres of gourmet pizza sauce, Sales Revenue generated will be Quantity*Price

=100,000*3.10 = $310,000

2. If TTI decides to simply sell the 100,000 liters of plain tomato sauce, Sales Revenue will be

=100,000*2 = $200,000

3. Additional revenue generation by selling Gourmet Pizza Sauce = 310,000-200,000 = $110,000

4. Cost of Conversion = 100,000*0.75 = $75,000

5. Financial Advantage of Selling Gourmet Pizza Sauce instead of plain pizza sauce = Additional Revenue – Conversion Costs

= 110,000-75000 = $35,000

6. If Cost is $1.25 per litre. Financial Advantage (Disadvantage)

= 110,000-1.25*100,000

=110,000-125,000

($15,000) i.e. Net disadvantage of $15,000