Question

Eunice Company produces two products from a joint process. Joint costs are $70,000 for one batch, which yields 1,000 liters of germain and 4,000 liters of hastain. Germain can be sold at the split-off point for $24 or be processed further, into geraiten, at a manufacturing cost of $4,100 (for the 1,000 liters) and sold for $33 per liter. If geraiten is sold, additional distribution costs of $0.80 per liter and sales commissions of 10% of sales will be incurred. In addition, Eunice's legal department is concerned about potential liability issues with geraiten—issues that do not arise with germain. Required: 1. CONCEPTUAL CONNECTION: Considering only gross profit, should germain be sold at the split-off point or processed further? Germain should be processed further as it will increase profit by $ for every 1,000 liters. 2. CONCEPTUAL CONNECTION: Taking a value-chain approach (by considering distribution, marketing, and after-the-sale costs), determine whether or not germain should be processed into geraiten. Germain should be processed further as it will increase profit by $ for every 1,000 liters.

Answer 1

Answer for 1)

If Germain is sold at split off point:

Sales revenue:($24×1000litres) . =$24000

(Less)cost at split off point:$[(70000/5000)×1000)]=$14000

Gross profit:$(24000-14000)=$10000

If it further processed:

Then sales revenue:(1000litres×$33)=$33000

(Less)additional cost:$4100

(Less) costs till spilt off point:$14000

Gross profit:$14900

If considering only gross profit it is recommended to further process the Germain as it additionally yield $4900($14900-$1000) for every 1000 litres

Answer for 2)

Considering value chain the additional costs are:

Additional distribution costs:1000litres×$0.80=$800

Sales commission:($33000×10%)=$3300

Increased profit after value chain approach:

$4900-$3300-$800=$800

Hence,it is recommended to Germain to be processed into geratien as it increase profit by $800 for every 1000 litres without considering the legal issue