Question

(14) Plastic Resin Company makes 2 types of iPhone covers, premier protectors and basic bumpers, from a joint process involving the conversion of resins. Joint costs are $60,000 for this process, and yield 2,000 premier protectors and 4,000 basic bumpers. Premier protectors sell for $80 a piece and basic bumpers sell for $20 per piece. Premier protectors require $80,000 in separable costs, while basic bumpers require $50,000 in separable costs. Basic bumper can be processed further for an additional separable cost of $30,000 into hybrid bumper that would sell for $30 per piece. (i) Show computation to determine whether the manufacturer should process the basic bumper further into hybrid bumper. (ii) What is the maximum amount that joint costs for processing resin can increase before it would be better to cease production of both premier protectors and hybrid bumpers entirely.

Answer 1

(i)the manufacturer should process the basic bumper further into hybrid bumper

Incremental Revenue*	$40,000
Incremental Costs	$30,000
Incremental Profit	$10,000

working Incremental Revenue

Hybrid Bumper sales (4,000 * $30)	$120,000
Less:separable costs	$50,000
Less:additional separable costs	$30,000
Incremental Revenue	$40,000

(ii)maximum amount that joint costs for processing resin can increase before it would be better to cease production of both premier protectors and hybrid bumpers entirely.

Total Revenue(protector:2000*80=$160,000 and hybrid bumpers =4000*30=$120,000)160,000+120,000	$280,000
Total Separabel costs($80,000+$50,000+$30,000)	$160,000
Joint Costs	$60,000
Net Profit	$60,000

maximum amount that joint costs for processing resin can increase before it would be better to cease production of both premier protectors and hybrid bumpers entirely is $60,000