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 $42 to buy from farmers and $10 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $24 or processed further for $15 to make the cocktail of nutrients that are sold for $44. The depeeled spuds can be sold as is for $35 or processed further for $24 to make frozen french fries that are sold for $56.

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?

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

Answer 1

a
Combined final sales value		100	=44+56
Less costs of producing the end products:
Cost of potatoes	42
Cost of peeling	10
Cost of further processing peels	15
Cost of further processing depeeled spuds	24	91
Profit		9
Profit = $9
b
	Cocktail of Organic Nutrients	Frozen French Fries
Final sales value after further processing	44	56
Less: Sales revenue at split off point	24	35
Incremental revenue from further processing	20	21
Less: Cost of further processing	15	24
Financial advantage(disadvantage) from further processing	5	-3
Cocktail of Organic Nutrients-Process further
Frozen French Fries- Sold as is