Question

Sell or Process Further Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $5 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $5 per liter or processed further into Product G at an additional cost of $2 per liter. Product G can then be sold for $10 per liter. Determine whether Product F should be sold or processed further into Product G. • Calculate the net advantage (disadvantage) of further processing. • Use a negative sign with your answer to indicate a net disadvantage (if applicable). $ 4 X per liter

Answer 1

		Price
a	Selling price of F product	$5
b	Additional cost to be incrred to further process	$2
c	Selling price of further processed F i.e G	$10
d	Incremental selling price (c-a)	$5
e	Net benefit of selling the product i.e Incremental benefit less additional cost (d-b)	$3	per litre
It is benefit to further process and sell the product because additional revenue we get processing F is $5 and additional cost incurred is $2
The joint cost is sunk cost and anyways it is already incurred cost and it is irrelevant for decision making
f	No of litres	$40
g	Net advantage of processsing (f*e)	$120