Question

Joint Cost 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 $425,000 for a standard production run that generates 175,000 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 Silken Skin. Soft Skin sells for $2.40 per gallon while Silken Skin sells for $3.90 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 Silken 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 $0.05 per gallon in packaging of Silken skin. There is sufficient excess capacity in Sun-Kissed'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 175,000 gallons of Soft Skin and 120,000 gallons of Silken 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 Silken Skin? Do not use negative signs with your answers. Profit from one production run: Soft skin Silken skin Total contribution margin Join production costs Total profit

Answer 1

Profit from one production run:
Soft Skin	175,000
Silken Skin	360,000
Total contribution margin	535,000
Joint production costs	425,000
Total profit	110,000
b. Incremental Effect
Additional contribution margin
Soft Skin	35,000
Silken Skin 240,000*(3.65-0.09+0.05)	672,000
Total	707,000
Additional costs/Lost profit
Original silken skin contribution margin	360,000
Joint Production costs	425,000
Increase (Decrease) in Overall Income	(78,000)

A 1 Profit from one production run: 2 Soft Skin 3 Silken Skin 4 Total contribution margin 5 Joint production costs 6 Total profit =175000*(2.4-1.4) = 120000*(3.9-0.9) =SUM(B2:B3) 425000 =B4-B5 7 8 b. Incremental Effect 9 Additional contribution margin 10 Soft Skin 11 Silken Skin 12 Total 13 Additional costs/Lost profit 14 Original silken skin contribution margin 15 Joint Production costs 16 Increase (Decrease) in Overall Income =1750 =175000*(1.6-1.4) = 120000*(3.65-0.9+0.05) =SUM(B10:B11) =B5 =B12-B15

A 1 Profit from one production run: 2 Soft Skin 3 Silken Skin 4 Total contribution margin 5 Joint production costs 6 Total profit =175000*(2.4-1.4) = 120000*(3.9-0.9) =SUM(B2:B3) 425000 =B4-B5 7 8 b. Incremental Effect 9 Additional contribution margin 10 Soft Skin 11 Silken Skin 12 Total 13 Additional costs/Lost profit 14 Original silken skin contribution margin 15 Joint Production costs 16 Increase (Decrease) in Overall Income =1750 =175000*(1.6-1.4) = 120000*(3.65-0.9+0.05) =SUM(B10:B11) =B5 =B12-B15