N-Air Corporation uses a joint process to produce three products: A, B, and C, all derived from one input. The company can sell these . products at the point of split-off (end of the joint process) or process them further. The joint production costs during October were $10,000. N-Air allocates joint costs to the products in proportion to the relative physical volume of output. Additional information is presented in the opposite column.Assuming sufficient demand exists, N-Air could sell all the products at the prices previously mentioned at either the split-off point or after further processing. To maximize its profits, N-Air Corporation should
Answer(s): C
To maximize profits, it must be determined whether each product's incremental revenues will exceed its incremental costs. Joint costs are irrelevant because they are sunk costs.It is most profitable for N-Air to process products A and B further and to sell product C at the split-off point.
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000. Concerning AM- 12, which one of the following alternatives is most advantageous?
The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1 .50)
Whitehall Corporation produces chemicals used in the cleaning industry During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-i 2 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90000.Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?
Answer(s): B
Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 + (60,000 units of AM-12 + 40,000 units of BM-36)]. The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost + 60,000 units)]. Total inventory value is $45,000 (10,000 units x $4.50), and total operating profit is $50,000 [50,000 units sold x ($5.50 unit price -- $4.50 unit cost)]
When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the highest
Answer(s): D
In the short run, many costs are fixed. Hence, contribution margin (revenues -- all variable costs) becomes the best measure of profitability. Moreover, certain resources are also fixed. Accordingly, when deciding which products to produce at full capacity, the criterion should be the contribution margin per unit of the most constrained resource.This approach maximizes total contribution margin.
Condensed monthly operating income data for Korbin, Inc. for May followsAdditional information regarding Korbin's operations follows:· One-fourth of each store's direct fixed costs would continue if either store is closed. · Korbin allocates common fixed costs to each store on the basis of sales dollars. · Management estimates that closing the Suburban Store would result in a 10% decrease in the Urban Store's sales, while closing the Urban Store would not affect the Suburban Store's sales.· The operating results for May are representative of all months. A decision by Korbin to close the Suburban Store would result in a monthly increase (decrease) in Korbin's operating income of
Answer(s): A
If the Suburban Store is closed, one-forth of its direct fixed costs will continue. Thus, the segment margin that should be used to calculate the effect of its closing on Korbin's operating income is $6,000 {$36,000 contribution margin- [$40,000 direct fixed costs x(1.0-.25)]}. In addition, the sales ( and contribution margin) of the Urban Store will decline by 10% if the Suburban store closes. A 10% reduction in Urban's $48,000 contribution margin will reduce income by $4,800. Accordingly, the effect of closing the Suburban Store is to decrease operating income by $10,800 ($6,000 + $4,800).
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