Question

Special Order, Traditional Analysis Fiorello Company manufactures two types of cold-pressed olive oil, Refined Oil and Top Quality Oil, out of a joint process. The joint (common) costs incurred are $92,500 for a standard production run that generates 30,000 gallons of Refined Oil and 15,000 gallons of Top Quality Oil. Additional processing costs beyond the split-off point are $2.40 per gallon for Refined Oil and $1.95 per gallon for Top Quality Oil. Refined Oil sells for $4.25 per gallon, while Top Quality Oil sells for $8.30 per gallon. MangiareBuono, a supermarket chain, has asked Fiorello to supply it with 30,000 gallons of Top Quality Oil at a price of $8 per gallon. MangiareBuono plans to have the oil bottled in 16-ounce bottles with its own MangiareBuono label. If Fiorello accepts the order, it will save $0.23 per gallon in packaging of Top Quality Oil. There is sufficient excess capacity for the order. However, the market for Refined Oil is saturated, and any additional sales of Refined Oil would take place at a price of $3.10 per gallon. Assume that no significant non-unit-level activity costs are incurred. Required: 1. What is the profit normally earned on one production run of Refined Oil and Top Quality Oil? $ 2. Should Fiorello accept the special order? Yes

Answer 1

Computation of Normal Profitability :-

Particulars	Refined Oil	Top Quality Oil	Total
a) No. of Gallons Produced	30000	15000	45000
b) Sale Price Per Gallon	$4.5	$8.3
c) Total Sale Price (a*b)	$127500	$124500	$252000
d) Additional Processing Cost Per unit	$2.40	$1.95
e) Additional Processing Cost (a*d)	$72000	$29250	$101250
f) Joint Cost (Allocated besis on Sale Price)	$46800	$45700	$92500
	($92500*$127500)/$252000	($92500*$124500)/$252000)
Net Profitability	$8700	$49550	$58250