Question

The Sun-kissed Company manufactures two skin-care lotions, Soft Skin and Silken skin, out of a joint process. The joint common costs incurred are $430,000 for a standard production run that generates 195,000 gallons of Soft Skin and 120,000 gallons of Silken skin. Additional processing costs beyond the split-off point are $1.40 per gallon for Soft Skin and $0.90 per gallon for Siken Skin Soft Skin sells for $2.40 per gallon while Silken Skin sells for $3.9 per gallon The Best Eastern Hotel chain has asked the Sun-kissed Company to supply it with 240,000 gallons of Silken skin at a price of $3,65 per gallon Best Eastern plans to have the Sikken Skin bottled in 1.5 ounce personal use containers that are supplied in each of its hotel rooms as part of the complimentary personal products for guest use. If Sun Kissed accepts the order, it will save 10.05 per gallon in packaging of Silken skin. There is sufficient excess capacity in Sunkissed's production system to handle just one more production run in order to have sufficient Silken Skin for this special order. However, the nature of the joint process always results in 195.000 galons of Soft Skin and 120,000 gallons of Siken Skin. Also, the market for Soft Skin is saturated; hence, any additional sales of Soft Skin would take place at a price of $1,60 per gallon a. What is the profit normally earned on one production run of Soft Skin and Siken Skin? Do not use negative signs with your answers. Profit from one production run Total contribution margin b. What is the incremental effect on overall income if the Sun Kissed Company accepts the special order for Silken skin? Use a negative signs with your answer only to indicate a decrease in overal income. Otherwise do not use negative signs with your answers, Additional costos profit Original Siken son contribution margin Joint production costs increase decrease in overal income

Answer 1

1.

Soft skin (195,000*$1(2.4-1.4)	$195,000
Silken skin (120,000*$3(3.9-0.9)	360,000
Total contribution margin	555,000
Joint production cost	430,000
Total profit	$125,000

2.

Additional contribution margin
Soft skin (195,000*$0.2($1.6-1.4)	$39,000
Silken skin [240,000*$2.8($3.65-0.85(0.9-0.05)]	672,000
Total	711,000
Additional cost/lost profit
Original silken skin contribution margin	360,000
Joint production cost	430,000
Increase (decrease) in overall income	-$79,000