Hello, I have this question that I would like some help with as I don\'t know ho

Question

Hello, I have this question that I would like some help with as I don't know how to solve it please. Thasnk you!

Smith Ltd. specialised in processing various categories of pork product. Its plants, located in Auckland, produce several products from a common process: sirloin roast, chops, spare ribs and the residual. The roasts, chops and spare ribs are packaged, branded, and sold to supermarkets. The residual consists of organ meats and leftover pieces that are sold to sausage and hot dog processors. The joints production costs for a typical week are as follows:

Direct materials $84,500

Direct labour 29,000

Overhead 20,000

The sales revenues from each product are as follows: sirloin roasts, $68,000; chops, $71,000; spare ribs, $33,000; and residual $9,800.

Smith Ltd.’s management has learned that certain organ meats are a prized delicacy in overseas markets. They are considering separating those from the residual and selling them abroad for a standardised value of $52,000. This would bring the sales of the residual down to a value of $2,650. In addition, the organ meats would need to be packaged and then air freighted to overseas. Further processing cost per week is estimated to $27,500. Transportation costs would be $12,100 per week. Finally resource spending would need to be expanded for other activities, such as purchasing, receiving and internal shipping. The increase in resource spending for these activities is estimated to $3,120 per week.

i) Calculate the gross profit earned by the original mix of products for one week of production in Smith Ltd.?

ii) Based solely on financial grounds, should the company separate the organ meats from the residual for shipping overseas or continue to sell the residual at split-off? Justify your answer with supportive calculations by considering only the incremental costs and revenues of the decision.

iii) Based on the decision you made in requirement ii), explain what is the effect of your decision on weekly gross profit for Smith Ltd.? Justify your answer with supportive calculations.

Explanation / Answer

i) Gross profit earned by original mix $ Sales : Sirloin roasts 68000 Chops 71000 Spare ribs 33000 residual 9800 Total sales 181800 Less: Direct materials 84500 Direct Labour 29000 Overhead 20000 Gross Profit 48300 Gross profit earned by seperation $ Sales : Sirloin roasts 68000 Chops 71000 Spare ribs 33000 residual 2650 Abroad sales 52000 Total sales 226650 Less: Direct materials 84500 Direct Labour 29000 Overhead 20000 Further processing costs 27500 Transportation costs 12100 Cost of additional resources 3120 Gross Profit 50430 The Gross profit after the spliting is $50,430 which is higher than the gross profit before spitting(ie $48,300) by $2,130. Hence it is suggested smith ltd to choose the spliting option.

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