Question

Connecticut Chemical Company is a diversified chemical processing company. The firm manufactures swimming pool chemicals, chemicals for metal processing, specialized chemical compounds, and pesticides.
Currently, the Noorwood plant is producing two derivatives, RNA–1 and RNA–2, from the chemical compound VDB developed by the company’s research labs. Each week, 1,200,000 pounds of VDB are processed at a cost of $246,000 into 800,000 pounds of RNA–1 and 400,000 pounds of RNA–2. The proportion of these two outputs cannot be altered, because this is a joint process. RNA–1 has no market value until it is converted into a pesticide with the trade name Fastkil. Processing RNA–1 into Fastkil costs $240,000. Fastkil wholesales at $50 per 100 pounds.

RNA–2 is sold as is for $100 per hundred pounds. However, management has discovered that RNA–2 can be converted into two new products by adding 600,000 pounds of compound LST to the 400,000 pounds of RNA–2. This joint process would yield 500,000 pounds each of DMZ–3 and Pestrol, the two new products. The additional direct-material and related processing costs of this joint process would be $240,000. DMZ–3 and Pestrol would each be sold for $60 per 100 pounds. If Connecticut processes RNA-2 further instead of selling it as is, its weekly profit would:

a) decrease by $40,000

b) increase by $20,000

c) increase by $60,000

d) increase by $25,000

e) decrease by $12,000

Answer 1

a) The weekly profit would decrease by $40,000

CASES	1) RNA-2 Not processed further	2) RNA-2 Processed further
ATTRIBUTES
Revenue ($) (Note 1)
RNA-2 sold off at split off point (without further processing)	$                                               400,000.00
DMZ		$                                  300,000.00
Pestrol		$                                  300,000.00
Costs
Joint Cost of processing VDB (Note 2)	$                                                (82,000.00)	$                                   (82,000.00)
Conversion Cost (given in the question- additional material, related processing cost)		$                                 (240,000.00)
Net Profit	$                                               318,000.00	$                                  278,000.00
As per the cases the net profit has decreased by	$                                                 40,000.00	($318,000-278,000)
Notes-
1) Calculation for RNA-2 revenue
Output of RNA-2 produced at split off point of VDB process	400,000 pounds	3) Revenue for DMZ and Pestrol
Selling Price (as given)	$100 per 100 pounds	Revenue for DMZ per pound	$60 per 100 pounds
Revenue = selling price*output at split off	$400,000	output produced for DMZ	500,000 pounds
	[400000 pounds*$100 per 100pounds]	Total revenue	$60/100 pounds*500000pounds
2) Joint cost for RNA-2			$300,000
Total Joint cost to process VDB (given)	$246,000
Total input of VDB processed	1200000 pounds	Revenue for Pestrol per pound	$60 per 100 pounds
Since, question does not mention any specific method to split the joint cost and considering RNA-1 has no sale value until it is further processed therefore, j'oint cost is split into RNA-1 and RNA-2 as per their output after processing VDB		output produced for Pestrol	500,000 pounds
RNA-1 output at split off point	800,000 pounds	Total revenue	$60/100 pounds*500000pounds
RNA-2 output at split off point	400,000 pounds		$300,000
Proportion of Joint cost to RNA-1	{$246,000/1200000}*800,000
	164,000.00
Proportion of Joint cost to RNA-2	{$246,000/1200000}*400,000