Question

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 S43. • 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)? What is the financial advantage (disadvantage) of processing the peeled potatoes into french fries (rather than selling them as plain peeled potatoes)?

Answer 1

(a) Joint costs relating to the processing of 100 batches of potatoes:

For Products Potato Peels and Peeled Potatoes, the joint costs are Peeling charges.

Given peeling charges per batch = $15

Joint costs for 100 batches = Peeling costs per batch * Number of batches = $15 * 100 = $1,500

(b) Financial Advantage/ (Disadvantage) of processing potato peels into organic nutrients:

Price of Potato Peels sold for pigs = $35

Price of Nutrients after processing of Potato peels = $43

Additional Revenue by processing = $43-$35 = $8

Additional processing charges incurred = $15

Financial Disadvantage = $8 - $15 = $7 per batch

Total Financial disadvantage = $7 * 100 =($700)

(c) Financial Advantage/ (Disadvantage) of processing peeled potatoes into french fries:

Price of Peeled Potatoes sold for human consumption = $45

Price of Fries after processing of Potatoes = $80

Additional Revenue by processing = $80-$45 = $35

Additional processing charges incurred = $24

Financial Advantage = $35 - $24 = $11 per batch

Total Financial Advantage = $11 * 100 =$1,100

(d) Profit if Jones processes potatoes for all financial advantages:

In order to get all financial advantages, the potato peels must be sold for pigs consumption and Peeled Potatoes must be processed into French fries and sold.

Revenue from Fries = 100* $80 = $8,000

Cost of processing to Fries = 100*$24= $2,400

Joint processing costs (Peeling costs)=100*$15 = $1,500

Revenue from selling peels to pigs =$35*100 = $3,500

Total Profit=Revenue from Peeled Potatoes(Fries) + Revenue from potato peels - Processing cost of Fries - Joint Peeling cost - Purchase Price = $8,000 + $3,500 - $2,400 - $1,500 - $9,300 = ($ 1,700)