Special Order, Traditional Analysis Fiorello Company manufactures two types of c

Question

Special Order, Traditional Analysis

Fiorello Company manufactures two types of cold-pressed olive oil, Refined Oil and Top Quality Oil, out of a joint process. The joint (common) costs incurred are $87,400 for a standard production run that generates 38,800 gallons of Refined Oil and 19,400 gallons of Top Quality Oil. Additional processing costs beyond the split-off point are $2.30 per gallon for Refined Oil and $1.90 per gallon for Top Quality Oil. Refined Oil sells for $4.20 per gallon, while Top Quality Oil sells for $8.35 per gallon.

MangiareBuono, a supermarket chain, has asked Fiorello to supply it with 38,800 gallons of Top Quality Oil at a price of $8.05 per gallon. MangiareBuono plans to have the oil bottled in 16-ounce bottles with its own MangiareBuono label.

If Fiorello accepts the order, it will save $0.26 per gallon in packaging of Top Quality Oil. There is sufficient excess capacity for the order. However, the market for Refined Oil is saturated, and any additional sales of Refined Oil would take place at a price of $3.01 per gallon. Assume that no significant non-unit-level activity costs are incurred.

Required:

1. What is the profit normally earned on one production run of Refined Oil and Top Quality Oil?

Explanation / Answer

Workings:

Schedule of profit earned of one production run of Refined Oil and Top Quality Oil. S.no Particulars Total Basis of Allocation of Common Cost Refined Oil ($) Top Quality Oil ($) 1 Joint Cost 87400 Total Sales Value 43,830 43,570 2 Processing Cost beyond Split -Off Point 126100 89,240 36,860 Total Cost A 133,070 80,430 Total Sale Value B 162,960 161,990 Profit B-A 29,890 81,560

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