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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 $89 each and the cost of processing a batch to produce intermediate products A and B is $36. Intermediate product A can be sold as is for $53 or processed further for $33 to make Product X that is sold for $79. Intermediate product B can be sold as is for $113 or processed further for $66 to make Product Y that is sold for $158.
Required:
A. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y?
B. Should each of the intermediate products, A and B, be sold as is or processed further into an end product?

Answer :

Answer:

Explanation:

                                  Product A              Product B     Total

Incremental rev.           79                       158                  237

Incremental cost           33                        66                   99

Contribution                  46                        92                  138

common cost                                                                    (89)

Cost of Processing                                                           (36)

Net income                                                                        13

B

Financial advantage - Incremental revenue- Incremental cost -Initial revenue

Product A

79-33-53 = - 7

Product B

158-66-113 = -21.

The two products are better sold at it is without further processing.

As no other cost is involved in the processing or selling and the initial selling price is greater than the incremental contribution , it is advisable that they are sold as they are

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