Kelp Company produces 3 joint products from seaweed. At the split-off point, 3 b

Question

Kelp Company produces 3 joint products from seaweed. At the split-off point, 3 basic products emerge: Sea Tea, Sea Paste, and Sea Powder. Each of these products can either be sold at the split-off point or be processed further. If they are processed further, the resulting products can be sold as delicacies to health food stores. Cost and revenue information is as follows: Sales Value and Additional Costs if Processed Further Product Pounds Produced Sales Value at Split Off Final Sales Vaule Additional Cost Sea Tea 9,000 $60,000 $90,000 $35,000 Sea Paste 4,000 80,000 160,000 50,000 Sea Powder 2,000 70,000 85,000 14,000 INSTRUCTIONS: A. Which products should Kelp process beyond the split off point? B. At what price per pound would it be advantageous for Kelp Co to sell Sea Paste as the split-off point rather than process if further? THANK YOU

Explanation / Answer

Hi, Part A Sea Tea = 60000 (Sales value if sold at the split-off point) 90000(Sales value if processed further) 35000(Incremental cost of further processing) Incremental proceeds if processed further = 90000 - 35000 = 55000 Incremental benefit/cost of further processing = 55000 - 60000 = -5000 Sea Paste 80000 (Sales value if sold at the split-off point) 160000(Sales value if processed further) 50000(Incremental cost of further processing) Incremental proceeds if processed further = 160000 - 50000 = 110000 Incremental benefit/cost of further processing = 110000 - 80000 = 30000 Sea Powder 70000 (Sales value if sold at the split-off point) 85000(Sales value if processed further) 14000(Incremental cost of further processing) Incremental proceeds if processed further = 85000 - 14000 = 71000 Incremental benefit/cost of further processing = 71000 - 70000 = 1000 Sea paste and sea powder offer additional benefit. Part B Incremental proceeds if processed further = 160000 - 50000 = 110000 Sales value if sold at the split-off point = 80000 Additional benefit at split-off point = 110000 - 80000 = 30000 Incremental benefit per pound = 30000/4000 = 7.5 + Current Price at split off point = 80000/4000 = 20 Minimum price = 20 + 7.5 = 27.5 Thanks, Aman

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