Question

Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into Product X. Intermediate product B can be further processed into Product Y. The common input is purchased in batches that cost $48 each and the cost of processing a batch to produce intermediate products A and B is $19. Intermediate product A can be sold as is for $27 or processed further for $17 to make Product X that is sold for $43. Intermediate product B can be sold as is for $58 or processed further for $34 to make Product Y that is sold for $86. Required: a. Assuming that no other costs are involved in processing the common input or in selling products, what is the profit (loss) from processing one batch of the common input into the products X and Y? b. What is the Financial advantage (disadvantage) from further processing? Should each of the intermediate products, A and B be sold as is or processed further?

Answer 1

a.
Combined final sales value ($43 + $86)		129
Less costs of producing final end product:
Cost of common input	48
Cost of processing a batch	19
Cost of further processing product A	17
Cost of further processing product B	34	118
Profit (loss) from processing one batch $		11
b.
	Product X	Product Y
Final sales value after further processing	43	86
Less: Sales value at split-off point	27	58
Incremental revenue from further processing	16	28
Less: Cost of further processing	17	34
Profit (loss) from further processing $	-1	-6
	Sell as it is without further processing	Sell as it is without further processing