Joint Products; Sell or Process Further
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 $80 per hundred pounds. However, management has discovered that RNA–2 can be converted into two new products by adding 400,000 pounds of compound LST to the 400,000 pounds of RNA–2. This joint process would yield 400,000 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 $120,000. DMZ–3 and Pestrol would each be sold for $57.50 per 100 pounds. The company’s management has decided not to process RNA–2 further based on the analysis presented in the following schedule.
| Process Further | |||
| RNA–2 | DMZ–3 | 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 direct materials(LST) and processing of RNA–2 |
— | 60,000 | 60,000 | 120,000 |
Total costs | $ 82,000 | $121,500 | $121,500 | $243,500 |
Weekly gross profit | $238,000 | $108,500 | $108,500 | $217,000 |
*$82,000 is one-third of the $246,000 cost of processing VDB. When RNA–2 is not processed further. one-third of the final output is RNA–2 (400,000 out of a total of 1,200,000 pounds).
†$123,000 is one-third of the $246,000 cost of processing VDB. When RNA–2 is processed further, one-half of the final output is DMZ–3 and Pestrol. The final product then are 800,000 pounds of RNA–1 400,000 pounds of DMZ–3; and 400,000 pounds of Pestrol.
Required:
Evaluate Connecticut Chemical Company’s analysis, and make any revisions that are necessary. Your critique and analysis should indicate:
a. Whether management made the correct decision.
b. The gross savings or loss per week resulting from the decision not to process RNA–2 further, if different from management’s analysis.
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