Question

Question 1 (5 points)

All amounts given are on a per batch basis.

Jones Company purchases potatoes from farm distributors at a price of $93.00, after which the potatoes are peeled, at a cost of $15, resulting in two intermediate products:

• Potato peels, that can be sold as food for pigs for $35.
• Peeled potatoes that can be sold as food for human consumption for $45.
• Instead of selling the potato peels as food for pigs, Jones can spend an additional $15 to turn the peels into organic nutrients that can be sold for $43.
• Instead of selling the peeled potatoes as is, Jones can spend an additional $24 to turn the potatoes into French fries and sell them for $80.

Required

a.         Assume Jones buys 100 batches of potatoes, based on the information above, what is the dollar amount of joint costs related to processing the 100 batches of potatoes?

b.         What is the financial advantage (disadvantage) of processing the potato peels into organic nutrients (rather than selling them as food for pigs)?

c.          What is the financial advantage (disadvantage) of processing the peeled potatoes into french fries (rather than selling them as plain peeled potatoes)?

d.         Assuming Jones processes the potatoes so as to recognize all financial advantages, what is Jones net income for the 100 batches?

Question # 2 (5 points)

Bardo, Inc. produces three products. Data concerning the selling prices and variable costs of the three products, along with the amount of milling time needed to produce a unit, appear below:

	Product
	F			G		H
Selling price	$	50	$		80	$	70
Variable costs	$	40	$		50	$	55
Milling machine time (hours)		2			5		5

Demand for the three products exceeds the company's productive capacity. The milling machine is the constraint, with only 2,400 hours of milling machine time available this week.

Required:

a.         Given the milling machine constraint and unlimited demand for each product, which product should be sold?

b.         Assuming that there is still unfilled demand for the product selected above, how much should the company be willing to pay for an additional hour of milling machine time?

c.          Assume demand for the products was: 300 units of F, 600 units of G, and 400 units of H. Also, assume there is no possibility of paying overtime or otherwise relaxing the milling machine constraint of only 2,400 hours of milling time. What combination of products should Bardo sell (i.e. how many units of each product) to maximize income?

d.         Selling the number of units of each product determined in question (c), what is Bardo’s net income, assuming fixed costs are$5,000?

Answer 1

Answer to Question 2.a

As the demand for each product is unlimited, decision as to which product to be produced shall be decided based on contribution per machine hour since machine hour is the constraint.

Particulars	product F	Product G	Product H
Selling Price	50	80	70
Variable cost	40	50	55
Contribution	10	30	15
Machine Hour	2	5	5
Cont per Machine hr	5	6	3
Ranking	II	I	III

AS per ranking given, product G shall be produced first and then product F and Product H.

b) As per the above table, Product G is the priority and if in case the machine hours available are not sufficient then the machine hours shall be sacrificed from Product F and Product H, in that case the company shall pay:-

variable cost +( machine hours sacrificed * contribution per machine hours of the product being sacrificed).

C) No relaxation of machine time, so we have two options either produce only Product G or Produce Product H and Product F.

Option 1

In order to produce 600 Units of product G we need 3000 machine Hours but we have only 2400 machine hours so with the available machine hours of 2400 we can produce only 480 (2400/5) units of product G.

In that case contribution would be:-

Contribution per unit = $30

Units = 480

Contribution = $14400

Option 2

First we allocate hours for producing product F :-

300 units @ 2 Machine hours per units = 600 Machine hours

now we have 1800 (2400-600) machine hours with us.

so with 1800 Machine hours we can produce 360 units (1800/5) of Product H.

Hence contribution for option 2 will be:

Particulars	Product F	Product H
Contributions per unit	10	15
No of units	300	360
Contribution	3000	5400

Total Contribution = $8400

We can also go with Product F and Product G in that case we have a contribution of $13800.

300 units of Product F and 360 units of Product G

(300*10) + (360*30) = $13800.

4) Contribution as per Option 1 :-

Particulars	Amount ($)
Contribution	14400
Fixed Cost	5000
Net Income	9400