Question

Cool Pool Ltd produces equipment and chemical supplies for the swimming pool industry. In one joint process, 10,000 litres of GSX are processed into 7,000 litres of xenite and 3,000 litres of banolide. The cost of the joint process including the GSX, is $40,000. Cool Pool allocates $28,000 of the joint cost to the xenolite and $12,000 of the cost to the banolide. the 3,000 litres of banolide can be sold at the split-off point for $5,000, or they can be processed further into a product called kitrocide. The sales value of the 3,000 litres of kitrocide is $20,000, and the additional processing cost is $26,200.

Cool Pool also manufacture pool vacuum cleaners. A new product is now available from India and Cool Pool's management are considering buying in these new vacuum cleaners and badging them as Cool Pool cleaners.

Cool Pool's managing director has asked your consulting firm to make a recommendation as to whether the banolide should be sold at the split-off point or processed further and to provide them with details of the issues that they should consider when making the decision to outsource this product.

Required

1. Write a letter providing an analysis and a recommendation with respect to whether the banolide should be sold at split off or processed further. Also include in this letter the key issues that the management should consider when making the outsourcing decision.

Answer 1

1) Cost of producing 3000 units of Benolide is $12000, which can be sold at this stage for $ 5000. This leads to a loss position of $ 7000 to the org.

2)  However, if it is processed further to produce 3000 units of Kitrocide, it generates a revenue of $ 20,000 with an additional cost of $26,200.

This results in a loss of $6,200 to the org.

3)  Conclusion: Since the amount of loss is reduced by $800 in case it produces Kitrocide, Co should hence process Benolide further rather than selling at a split off stage.

4)  Decision: The org shall outsource the activity only in case it is able to reduce the loss more from $800. or else it is better to produce the product in house.