A Mobel pctrochemrcal (actor) produces mo products, l and M. as a result of a pa

Question

A Mobel pctrochemrcal (actor) produces mo products, l and M. as a result of a particular joint proces. th products arc soId lo manufactures a>> ingredient (or assorted chemical products. l'roduct l sells per gaIk; Product M for SO.10 per gallon. Data for April follows. Suppose that in April the 2.500.000 gallons of M could have been processed further into super M ai on additional cost of 5210.000 The super M output would he sold foe $0.38 per talion. Product I would be sold at I split off in any event. Should M have been processed further in April and sold as Super M? Show your computations

Explanation / Answer

In this case we will have to look at the incremental revenues and costs.

Incremental revenue from selling super M = quantity in gallons*change in selling price per gallon

= 2,500,000 gallons*($0.38 - $0.30) = $200,000.

However the incremental cost associated with manufacturing super M = $210,000. The joint processing fee will be the same at $1,600,000.

Thus incremental cost > incremental revenue. This will result in a decline in profits from the level when M was made (and not super M).

Hence M should not be processed further.

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