Question

Sell or Process Further, Basic Analysis

Carleigh, Inc., is a pork processor. Its plants, located in the Midwest, produce several products from a common process: sirloin roasts, 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 joint costs for a typical week are as follows:

Direct materials	$82,000
Direct labor	33,400
Overhead	23,500

The revenues from each product are as follows: sirloin roasts, $73,500; chops, $73,000; spare ribs, $30,500; and residual, $8,600.

Carleigh’s management has learned that certain organ meats are a prized delicacy in Asia. They are considering separating those from the residual and selling them abroad for $53,000. This would bring the value of the residual down to $2,000. In addition, the organ meats would need to be packaged and then air freighted to Asia. Further processing cost per week is estimated to be $26,800 (the cost of renting additional packaging equipment, purchasing materials, and hiring additional direct labor). Transportation cost would be $10,300 per week. Finally, resource spending would need to be expanded for other activities as well (purchasing, receiving, and internal shipping). The increase in resource spending for these activities is estimated to be $3,000 per week.

Required:

1. What is the gross profit earned by the original mix of products for one week?
$

2. Should the company separate the organ meats for shipment overseas or continue to sell them at split-off?

What is the effect of the decision on weekly gross profit?
_______by $

Answer 1

1. Gross profit earned through original mix of products for 1 week is computed as:

Particulars Sales revenue: sirloin roasts chops spare ribs residual Less: costs: Amount Amount $73,500 $73,000 $30,500 $8,600 $185,600 Direct material Direct labor overhead Gross profit $82,000 $33,400 $23,500 $138,900 $46,700

Thus,gross profit for original mix of products for 1 week is $46,700.

2. If the company separates the organ meats and ship them abroad, then gross profit will be:

Particulars Sales revenue: sirloin roasts Amount Amount $73,500 chops spare ribs residual sold at abroad residual Less: costs: $73,000 $30,500 $53,000 $2,000 $232,000 Direct material Direct labor Overhead Further processing cost Transportaion cost Resource spending Gross profit $82,000 $33,400 $23,500 $26,800 $10,300 $3,000 $179,000 $53,000

Yes, the company must separate the organ meats for shipment abroad and must stop selling them at split off. As by shipping the organ meats abroad the additional revenues will be more than additional expenses.As increase in revenue is ($53,000-$8,600+$2,000)=$46,400 whereas increase in cost is ($26,800+$10,300+$3,000) =$40,100, thus company is able to earn additional revenue.

This decision of shipping the organ meats abroad would increase the weekly gross profit by $6,300 as ($53,000-$46,700)=$6,300

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Particulars Sales revenue: sirloin roasts Amount Amount $73,500 chops spare ribs residual sold at abroad residual Less: costs: $73,000 $30,500 $53,000 $2,000 $232,000 Direct material Direct labor Overhead Further processing cost Transportaion cost Resource spending Gross profit $82,000 $33,400 $23,500 $26,800 $10,300 $3,000 $179,000 $53,000