Talor Chemical Company is a highly diversified chemical processing company. The company manufactures swimming pool chemicals, chemicals for metal processing companies, specialized chemical compounds for other companies, and a full line of pesticides and insecticides.
Currently, the Noorwood plant is producing two derivatives, RNA-1 and RNA-2, from the chemical compound VDB, developed by Talor’s research labs. Each week 1.2 million 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 is fixed. RNA-1 has no market value until it is converted into a product with the trade name Fastkil. The cost to process RNA-1 into Fastkil is $240,000 a week. Fastkil wholesales at $50 per 100 pounds.
RNA–2 is sold as is for $80 per 100 pounds. However, Talor has discovered that RNA–2 can be converted into two new products through further processing, which would require the addition of 400,000 pounds of compound LST to the 400,000 pounds of RNA–2. The joint process would yield 400,000 pounds each of DMZ–3 and Pestrol, the two new products. The additional raw material and related processing costs of this joint process would be $120,000 per week. DMZ–3 and Pestrol would each be sold for $57.50 per 100 pounds. Talor management has decided not to process RNA–2 further,based on the analysis presented in the following schedule. Talor uses the physical weight method to allocate the common costs arising from joint processing.
| RNA-2 | DMZ-3 | Process Further Pestrol | Total | |
| Production in pounds | 400,000 | 400,000 | 400,000 | |
| Revenue | $320,000 | $230,000 | $230,000 | $460,000 |
| Costs | ||||
| VDB costs | $ 82,000 | $ 61,500 | $ 61,500 | $123,000 |
| Additional raw materials | ||||
| (LST) and processing | ||||
| of RNA-2 | — | 60,000 | 60,000 | 120,000 |
| Total costs | $ 82,000 | $121,500 | $121,500 | $243,000 |
| Weekly gross profit | $238,000 | $108,500 | $108,500 | $217,000 |
A new staff accountant who was to review the analysis commented that it should be revised and stated, “Product costing of products such as these should be done on the basis of net relative sales value, not on a physical volume basis.”
Required:
a. Discuss whether the use of the net relative sales value method would provide data more relevant for the decision to market DMZ-3 and Pestrol.
b. Critique Talor Company’s analysis and make any revisions that are necessary. Your critique and analysis should indicate
(i) Whether Talor has made the correct decision.
(ii) The gross savings (loss) per week of Talor’s decision not to process RNA-2 further, if different from the company-prepared analysis.
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