Question

Sell or Process Further, Basic Analysis

Carleigh, Inc., is a pork processor. Its plants, located in the Midwest, produce several products from a common process: sirloin roasts, chops, spare ribs, and the residual. The roasts, chops, and spare ribs are packaged, branded, and sold to supermarkets. The residual consists of organ meats and leftover pieces that are sold to sausage and hot dog processors. The joint costs for a typical week are as follows:

Direct materials	$85,500
Direct labor	34,200
Overhead	18,500

The revenues from each product are as follows: sirloin roasts, $71,000; chops, $69,500; spare ribs, $30,500; and residual, $8,400.

Carleigh’s management has learned that certain organ meats are a prized delicacy in Asia. They are considering separating those from the residual and selling them abroad for $55,000. This would bring the value of the residual down to $2,600. In addition, the organ meats would need to be packaged and then air freighted to Asia. Further processing cost per week is estimated to be $27,700 (the cost of renting additional packaging equipment, purchasing materials, and hiring additional direct labor). Transportation cost would be $10,800 per week. Finally, resource spending would need to be expanded for other activities as well (purchasing, receiving, and internal shipping). The increase in resource spending for these activities is estimated to be $3,150 per week.

Required:

1. What is the gross profit earned by the original mix of products for one week?
$

2. Should the company separate the organ meats for shipment overseas or continue to sell them at split-off?
Separate the organ meats for shipment overseas

What is the effect of the decision on weekly gross profit?
Increase  by $

Answer 1

Answer:

1)

Gross profit =     Total Revenues - Total Joint costs                           = ($71,000 + $69,500 + $30,500 + $8,400 ) (-) ($85,500 + $34,200 +$18,500)                           =    $179,400   (-) $138,200                           =   $41,200

2)

Yes, The company should separate the organ meats for shipment overseas and should stop selling them at split off

Additional or Increase in Profit                = Total Revenue (-) Total relevent cost associated with decision                =    ($55,000 + $2,600 ) (-) ($27,700 + $10,800 +$3,150 + $8,400 (Opportunity Cost)                =    $57,600   (-) $50,050                =     $7,500

Further processing will increase profit by $7,500