Question

One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound, and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6.00.

What is the effect on profits of further processing product Y into product Z?

**Please show your computations

Answer 1

In first scenario we decide not to process Product Y into Product Z.Then our total sales will be based on sale of Product X & Y.
Total sales = (60 pounds of X x $2.5 per pound) + (40 pounds of Y x $3 per pound)
=> $270.
Joint costs = $135
So Net profits = $270 - $135 => $135

Now if we decide to process 40 pounds of Y into 30 pound of Z. Our total sales will be as follows
Total sales = (60 pound of X x $2.5 per pound) + (30 pounds of Z x $6 per pound)
=> $330
But, Our total costs will increase by an additional cost of $60 bringing our total cost to $195 ($135 + $60)
So new Net Profit = $330 - $195 => $135

Hence from the above solution we see that there is no effect on profits of further processing Product Y into Product Z as our Net profits remains same in both cases i.e. $135