Question

Problem 17-29 Joint Costs; Allocation and Production Decisions (LO 17-4, 17-5)

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Biondi Industries is a manufacturer of chemicals for various purposes. One of the processes used by Biondi produces HTP–3, a chemical used in hot tubs and swimming pools; PST–4, a chemical used in pesticides; and RJ–5, a product that is sold to fertilizer manufacturers. Biondi uses the net-realizable-value method to allocate joint production costs. The ratio of output quantities to input quantities of direct material used in the joint process remains consistent from month to month. Biondi Industries uses FIFO (first-in, first-out) in valuing its finished-goods inventories.

Data regarding Biondi’s operations for the month of October are as follows. During this month, Biondi incurred joint production costs of $1,850,000 in the manufacture of HTP–3, PST–4, and RJ–5.

	HTP–3			PST–4			RJ–5
Finished goods inventory in gallons (October 1)		19,500			54,100			3,300
October sales in gallons		680,000			340,000			165,000
October production in gallons		760,000			380,000			185,000
Additional processing costs	$	904,000		$	846,000		$	66,000
Final sales value per gallon	$	4.30		$	6.30		$	5.30

Problem 17-29 Part 3

1. 3-a. Suppose Biondi Industries has a new opportunity to sell PST–4 at the split-off point for $4.10 per gallon. Calculate the per gallon profit (loss) of processing further PST-4.
2. 3-b. Should the company sell PST-4 at the split-off point or continue to process this product further?

Answer 1

Additional processing costs	$                  846,000
Divided by: October production in gallons	380,000
Additional processing costs per gallon	$             2.2263158
Final sales value per gallon	$           6.30000000
Less: Selling price per gallon at the split-off point	$           4.10000000
Incremental revenue per gallon	$           2.20000000
Less: Additional processing costs per gallon	$           2.22631579
Profit (loss) of processing further PST-4 per gallon	$        (0.02631579)
Profit (loss) of processing further PST-4 per gallon (rounded)	$                      (0.03)
Should the company sell PST-4 at the split-off point or continue to process this product further?
Company Should sell PST-4 at the split-off point. (Not further process.)
(Hint: Profit (loss) of processing further PST-4 per gallon is loss of $ 0.03 (Rounded)