Sell or Process Further
An Exxon factory produces two products, L and M as a result of a particular joint
process. Both products are sold to manufacturers as ingredients for assorted chemical
products.
Product L sells at a split-off for $0.25 per gallon; M for $0.30 per gallon. Data are as
follows:
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
Joint processing cost
$1,600,000
Gallons produced and sold
L
4,000,000
M
2,500,000
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
Suppose that in April the 2,500,000 gallons of M could have been processed further into
super M at an additional cost of $225,000. The super M output would have been sold for
$0.38 per gallon. Product L would be sold at split-off in any event.
Required:
Should M have been processed further in April and sold as super M? Show Computation.
Sell at split-off as M
Process further and sell
as Super M
Revenues
750,000 (0.30 X
950,000 (0.38
2,500,000)
x2,500,000)
Separable cost beyond
(225,000)
split-off (Additional
cost)
Income effect
750,000
725,000
This analysis show that there are $25,000 more profitable to sell at split-off than to make
process further
Sell or process further analysis—firm as a whole:
Alternative 1
Revenues
Joint Cost
Alternative 2
L
M
Total
L
S.M
Total
1,000,000
750,000
1,750,000
1,000,000
950,000
1,950,000
1,600,000
Separable Cost
1,600,000
225,000
Total Cost
1,600,000
1,825,000
Income Effect
$150,000
$125,000
Alternative 1 is the best because it gives more profitability $25,000 than alternative 2