Zen Co. has a joint production process that results in two products: Q & Z. 800
ID: 2462935 • Letter: Z
Question
Zen Co. has a joint production process that results in two products: Q & Z. 800 ounces of Q are produced in each run. Q can be sold at split off for $1 per ounce. Alternatively, Q can be processed into 775 ounces of Z (25 ounces are lost in the additional processing). Additional processing costs are $0.12 per ounce of Q that is processed further. Z can be sold for $1.20 per ounce. Joint costs total $600. Zen sells all it makes (no inventories). What should Zen do? Assume Zen is a price-taker for both Q and Z, and that the current selling prices reflect market price Their target profit is 50% of production costs. Can Zen reach this profit target selling either Q or Z? Show calculations to support your answer.Explanation / Answer
A)
If not processed further, Product Q sold at $1, then Profit would be $1 * 800 - $600 = $200
If processed further, Product Z sold at $1.20, the profit would be = ($1.20 - 0.12) * 775 - $600 = $234
So, Zen should process further to produce Product Z as profit rises on further processing to $234 from $200.
B)
As per assumption Zen is a price-taker for both product Q and Z and selling price can't increase.
The Zen would not able to meet its target profit of 50% of production costs with either product Q or Z.
As for Q, the target profit is $(600 * 50%) = $300, whereas its profit is $200.
As for Z, the target profit is $(600 + 96) * 50% = $348, whereas its profit is $234.
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