Connecticut Chemical Company is a diversified chemical
processing company. The firm manufactures swimming pool chemicals,
chemicals for metal processing, specialized chemical compounds, and
pesticides.
Currently, the Noorwood plant is producing two derivatives, RNA–1
and RNA–2, from the chemical compound VDB developed by the
company’s research labs. Each week, 1,200,000 pounds of VDB are
processed at a cost of $246,000 into 800,000 pounds of RNA–1 and
400,000 pounds of RNA–2. The proportion of these two outputs cannot
be altered, because this is a joint process. RNA–1 has no market
value until it is converted into a pesticide with the trade name
Fastkil. Processing RNA–1 into Fastkil costs $240,000. Fastkil
wholesales at $50 per 100 pounds.
RNA–2 is sold as is for $100 per hundred pounds. However, management has discovered that RNA–2 can be converted into two new products by adding 600,000 pounds of compound LST to the 400,000 pounds of RNA–2. This joint process would yield 500,000 pounds each of DMZ–3 and Pestrol, the two new products. The additional direct-material and related processing costs of this joint process would be $240,000. DMZ–3 and Pestrol would each be sold for $60 per 100 pounds. If Connecticut processes RNA-2 further instead of selling it as is, its weekly profit would:
a) decrease by $40,000
b) increase by $20,000
c) increase by $60,000
d) increase by $25,000
e) decrease by $12,000
a) The weekly profit would decrease by $40,000
CASES | 1) RNA-2 Not processed further | 2) RNA-2 Processed further | |
ATTRIBUTES | |||
Revenue ($) (Note 1) | |||
RNA-2 sold off at split off point (without further processing) | $ 400,000.00 | ||
DMZ | $ 300,000.00 | ||
Pestrol | $ 300,000.00 | ||
Costs | |||
Joint Cost of processing VDB (Note 2) | $ (82,000.00) | $ (82,000.00) | |
Conversion Cost (given in the question- additional material, related processing cost) | $ (240,000.00) | ||
Net Profit | $ 318,000.00 | $ 278,000.00 | |
As per the cases the net profit has decreased by | $ 40,000.00 | ($318,000-278,000) | |
Notes- | |||
1) Calculation for RNA-2 revenue | |||
Output of RNA-2 produced at split off point of VDB process | 400,000 pounds | 3) Revenue for DMZ and Pestrol | |
Selling Price (as given) | $100 per 100 pounds | Revenue for DMZ per pound | $60 per 100 pounds |
Revenue = selling price*output at split off | $400,000 | output produced for DMZ | 500,000 pounds |
[400000 pounds*$100 per 100pounds] | Total revenue | $60/100 pounds*500000pounds | |
2) Joint cost for RNA-2 | $300,000 | ||
Total Joint cost to process VDB (given) | $246,000 | ||
Total input of VDB processed | 1200000 pounds | Revenue for Pestrol per pound | $60 per 100 pounds |
Since, question does not mention any specific method to split the joint cost and considering RNA-1 has no sale value until it is further processed therefore, j'oint cost is split into RNA-1 and RNA-2 as per their output after processing VDB | output produced for Pestrol | 500,000 pounds | |
RNA-1 output at split off point | 800,000 pounds | Total revenue | $60/100 pounds*500000pounds |
RNA-2 output at split off point | 400,000 pounds | $300,000 | |
Proportion of Joint cost to RNA-1 | {$246,000/1200000}*800,000 | ||
164,000.00 | |||
Proportion of Joint cost to RNA-2 | {$246,000/1200000}*400,000 |
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