Question

BioMorphs Corporation produces three products in a monthly joint production process. During the first stage of the process liquids and chemicals costing $78,400 are heated and three different compounds emerge: 3,000 gallons of Molecue worth $22 per gallon are created from the steam; 10,000 gallons of Borphue worth $15 are drained from the tank; and 1,000 gallons of the tank residue, labeled as Polygard, are sold as fertilizer for $7.50 per gallon. Before Molecue is sold, it must be purified in another process that costs $10,400, and before the Polygard fertilizer is sold, it must be bottled at a price of $1.50 per gallon.

a. What is the profitability of the joint process?

b. Is it profitable to process Molecue further if it can be sold at split-off for $9 per gallon?

c. BioMorphs has an offer to buy Polygard bulk at the split-off point without bottling for $3,300 per month. What is the incremental profit (loss) to BioMorphs if it accepts the offer?

Answer 1

Answer a

Computation of profitability of the joint process

Particulars	Amount ($)	Amount ($
Sales Revenue :
Molecue ( 3,000 gallons * $22)	66,000
Borphue (10,000 gallons * $15 )	150,000
Polygard (1,000 gallons * $7.50)	7,500
Total Sales Revenue		223,500
Total Costs :
Joint Cost	78,400
Purification Cost of Molecue	10,400
Cost of bottles for Polygard (1,000 gallons * $1.50 )	1,500
Total Costs		90,300
Profitability of the joint process		$133,200

Answer b

Yes , its is profitable to process Molecue further than to be sold at split-off point

Explanation : Incremental revenue for further processing = ($22 - $9) * 3,000 gallons = $39,000

Incremental cost for  further processing = $10,400.

Incremental Profit if processed further =  $39,000 -  $10,400. = $28,600.

Answer c

Decrease in revenue for Polygard if offer is accepted = (1,000 gallons * $7.50) - $3,300 = $4,200

Saving in cost for Polygard if offer is accepted = 1,000 gallons * $1.50 = $1,500

Incremental profit (loss) to BioMorphs if it accepts the offer = $1,500 - $4,200 = ($2,700)