Eeyore Corporation produces two intermediate products, A and B, from a common input. Intermediate product A...

Eeyore 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 $37 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $13 to make Product X that is sold for $33. Intermediate product B can be sold as is for $45 or processed further for $26 to make Product Y that is sold for $66.

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?

Solutions

Expert Solution

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?

Selling Price of Product X = $33

Selling Price of Product Y = $66

Total revenue = $66 + $33 = $99

Common Input cost = $37

Intermediate processing cost = $15

Cost of further processing A to make X= $13

Cost of further processing B to make Y= $26

Total cost = $37 + $15 + $13 + $26 = $91

Total Profit = $99 - $91 = $8

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?

We have to follow incremental analysis to determine sale or further processing decison making.

Product A

Current selling price of A = $21

Selling Price of Product X = $33

Cost of further processing A to make X= $13

Incremental benefit of X = $33 - $13 = $20

Incremental benefit of X is lower than A, so donot process further.

Product B

Current selling price of B = $45

Selling Price of Product Y = $66

Cost of further processing B to make Y= $26

Incremental benefit of X = $66 - $26 = $40

Incremental benefit of Y is lower than B, so donot process further.

ekkarill92 answered 1 year ago

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