Question

The Moisturizer Company buys crude oil. The oil is refined into four products at the split-off point: soap grade, cooking grade, light moisturizer, and heavy moisturizer. Light moisturizer is fully processed at the split-off point. Soap grade, cooking grade, and heavy moisturizer can individually be refined into fine soap, cooking oil, and premium moisturizer. In the most recent month, the output at the split-off point was as follows:

Soap grade	120,000 L
Cooking grade	350,000 L
Light moisturizer	150,000 L
Heavy moisturizer	150,000 L

The joint costs of purchasing the crude oil and processing it were $200,000. Sales of the light moisturizer for the month were $50,000. Total output of soap, cooking oil, and heavy moisturizer was further refined and then sold. Data relating to the month are as follows:

Product	Additional Processing Costs	Sales
Fine soap	$200,000	$325,000
Cooking oil	85,000	100,000
Premium moisturizer	90,000	120,000

Moisturizer Company had the option of selling the soap grade, cooking grade, and heavy moisturizer at the split-off point. This alternative would have yielded the following sales for the month:

Soap grade	$50,000
Cooking grade	20,000
Heavy moisturizer	80,000

Required

Determine whether each product should be sold at the split-off or processed further. Use numbers to support your conclusions.

What would the impact to operating income be if your recommendations were followed?

Answer 1

Answer is given below