Question

1. Joint Costing problem: O’Mally Corporation makes different types of fertilizers and uses a joint process that costs $16,000 for inputs and processing each batch of chemicals. Processing one batch results in the following joint outputs:

	Quantity	Sales price	Further processing	Sales price after
Product	in liters	at split off	costs	further processing
X	1,000,000	.09 per liter	30,000	.11 per liter
Y	500,000	.05 per liter	20,000	.10 per liter

b. Which mix of products should O’Malley sell to maximize profits?

Answer 1

Product	Quantity in litres	Sales price after further processing	Increase in selling price after further processing	Incremental sales revenue after further processing	Further processing costs	Incremental gain after Further processing
X	1,000,000	.11 per liter	.02	1,000,000 x 0.02 = 20,000	30,000	20,000 - 30,000 = - 10,000
Y	500,000	.10 per liter	.05	500,000 x 0.05 = 25,000	20,000	25,000 - 20,000 = 5,000

As can be seen from the above table that processing further of product X would result in a loss of $10,000, hence product X should be sold at the split off point.

Product Y should be processed further as processing further of product Y will provide an additional income of $5,000.

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