Spurrier Corporation produces two intermediate product, A and B, from a common i

Question

Spurrier Corporation produces two intermediate product, A and B, from a common input.  Intermediate product A can be further processed into end product X.  Intermediate product B can be further processed into end product Y.  The common input is purchased in batches that cost $50 each and the cost of processing a batch to produce intermediate products A and B is $15.  Intermediate product A can be sold as is for $28 or processed further for $18 to make end product X that is sold for $43.  Intermediate product B can be sold as is for $31 or processed further for $24 to make end product Y that is sold for $68.

Required:

A. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y?

B. Should each of the intermediate products, A and B, be sold as is or processed further into an end product?

Explanation / Answer

a. Total cost involved in making the finished product = 50+15+18+ 24 =107

Total revenue generated from the end products X and Y = 43 + 68 = 111

Profit made = 111-107 =$4

b) for A

if A is sold is, profit = $28

if A is processed further to make X , profit = $43-18 =$25

The profit made after processing is lower, hence A should not be processed further to make X

For B

if B is sold as is, profit = $31

if B is processed further to make Y, profit = $68-24=$44

The profit made under processing is higher, hence B should be processed further to make Y

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