Question

A Mobil petrochemical factory produces two products, L and M, as a result of a particular joint process. Both products are sold to manufactures as ingredients for assorted chemical products. Product L sells at a split off for $0.25 per gallon; Product M for $0.30 per gallon. Data for April follows:

Joint processing cost $1,600,000 Gallons produced and sold
L 4,000,000
M 2,500,000

Suppose that in April the 2,500,000 gallons of M could have been processed further into super M at an additional cost of $210,000. The super M output would be sold for $0.38 per gallon. Product L would be sold at a split off in any event.

Required: Should M have been processed further in April and sold as Super M? (Make an incremental analysis).

Answer 1

Answer:

Product M should not have been processed further. The only valid approach is to concentrate on the separable costs and revenues beyond split-off:

Sell at Process

Split-off   Further as

   as M Super M Difference

Revenues, 2,500,000 gallons @$ 0.25 &$0.30 $750,000   $950,000   $200,000

Separable costs beyond split-off _____ -- 210000 210000

Income effects for April   $750,000   $740000   $ (10000)

The joint costs do not differ between alternatives and are irrelevant to the question of whether to sell or process further. The next table (not required) confirms the results (in thousands):

Alternative 1    Alternative 2

Super Differential

L M Total    L M   Total Effects   

Revenues   $1,000 $750   $1,750   $1,000   $950 $1950 $ 200

Joint costs   $1,600   $1,600    ---

Separable costs ---    210    210    210

Total costs $1,600   $1810   $210

Income effects   $ 150   $ 140   $(10)