Question

BioMorphs Corporation produces three products in a monthly joint production process. During the first stage of the process liquids and chemicals costing $83,900 are heated and three different compounds emerge: 3,000 gallons of Molecue worth $22 per gallon are created from the steam; 10,000 gallons of Borphue worth $15 are drained from the tank; and 1,000 gallons of the tank residue, labeled as Polygard, are sold as fertilizer for $7.00 per gallon. Before Molecue is sold, it must be purified in another process that costs $10,900, and before the Polygard fertilizer is sold, it must be bottled at a price of $1.50 per gallon.

a. What is the profitability of the joint process?

b. Is it profitable to process Molecue further if it can be sold at split-off for $9 per gallon?

c. BioMorphs has an offer to buy Polygard bulk at the split-off point without bottling for $3,300 per month. What is the incremental profit (loss) to BioMorphs if it accepts the offer?

Answer 1

a.profitability of joint process

Revenue:
Molecule	$66,000	(3000*$22)
Borphue	$150,000	(10,000*$15)
Polygard	$7,000	(1,000*$7)
Less: Cost
Joint cost	($83,900)
Additional molecule cost	($10,900)
Additional polygard cost	($1500)	($1.50*1,000)
Net profit/(Los)	$126,700	(66000+150000+7000-83900-10900-1500)

profitability of joint process is $126,700

2.We will compare incremental Revenue and incremental cost of further processing molecule.

• Incremental revenue = ($22-$9) = 3000 gallons

         =$39,000

• Incremental Cost = $10,900
• Incremental profit(Loss)=Incremental revenue-incremental cost

        =$39,000-$10,900

        =$28,100

Yes, molecule should be further processed as it will result in an additional income of $28,100

3.Polygard current income

Revenue	$7,000	1,000*$7
Additional Cost	($1500)	1000*$1.5
Net income	$5,500	(7,000-1,500)

Polygard special offer

Revenue	$3,300
Additional cost	$0	As sold without bottling
Net income	$3,300

Decrease in income = $5,500-$3,300 =$2,200

Thus, Incremental loss is $2,200 in this case.