Question

Sell or Process Further Port Allen Chemical Company processes a raw material D into join products E and F. Raw material D costs $12 per liter. It costs $100 liters of D into 60liters of E and 40 liters of F. Product F can be sold immediately for $12 per liter or processed further into Product G at an additional cost $10 per liter. Product G can then be sold for $26 per liter. Required

Determine whether Product F should be sold or processed further into Product G. (Please show all work)

Answer 1

The product should be processed further if proceeds from processed producr is higher than the proceeds before processing + processing cost

Joint cost incurred upto the split off point are sunk costs and hence, are not relevant

Benefit of processing = Sales proceeds from Product G - Proceeds from Product F - processing costs

= 26-12-10

I.e. $4 per litre

Hence, the product should be processed further into Product G