Swagger Corporation purchases potatoes from farmers. The potatoes are then peele
ID: 2508772 • Letter: S
Question
Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $42 to buy from farmers and $12 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $24 or processed further for $17 to make the cocktail of nutrients that are sold for $44. The depeeled spuds can be sold as is for $35 or processed further for $24 to make frozen french fries that are sold for $56.
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 potatoes into the cocktail of organic nutrients and frozen french fries?
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product?
Explanation / Answer
a)
i) Cost of Potatoes = $42
ii) Cost to peel = $12
iii) Processing Cost to make the Cocktail of nutrients = $17
iv) Processing cost of depeeled spuds to make frozen fries = $24
Total Cost = i + ii + iii + iv = $95
Total Revenue from Sale of Cocktail and frozen French fries = $ (44+56) = $ 100
So, Money made by the company from processing one batch of potatoes into Cocktail of Organic nutrients frozen French fries = Total Revenue – Total Cost = 100-95 = $5
b)
The corporation has 2 alternatives each with respect to intermediate products:
Peels- Sale peels as it is or Sale peels after further processing
Depeeled Spuds – Sale as it is or Sale after further processing
The corporation should choose the alternative which increases its total net benefit in each alternative. Let us evaluate each alternative one by one.
Peels-
Net Benefit = Revenue earned = $ 24
2. Sale after processing –
Net Benefit= Revenue earned – Cost of further processing =$ (44 – 17)
= $27
So we shall sell the peels after further processing into Cocktail of Organic nutrients.
Depeeled Spuds-
Net benefit = Revenue earned = $35
2.Sale after processing into end product-
Net benefit = Revenue earned – Cost of further processing =$(56 – 24)
= $32
So we shall sell the depeeled spuds as it is.
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