Mann Corporation has a joint process, which produces three products, A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to $125,000. Other relevant data are as follows:

-To maximize profits, which products should Mann process further?
A) Product C only
B) Product B only
C) Product A only
D) Products A, B and C

Question

Mann Corporation has a joint process, which produces three products, A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year amount to $125,000. Other relevant data are as follows:
 
-To maximize profits, which products should Mann process further?
A) Product C only 
B) Product B only 
C) Product A only 
D) Products A, B and C

Quizplus · Accepted Answer

To determine which products to process further, we need to calculate the incremental revenue (revenue from selling the processed product minus the revenue from selling the product at split-off) and compare it to the incremental cost (processing cost minus the revenue from selling the byproducts at split-off).

For Product A, the incremental revenue is $50,000-$20,000 = $30,000 and the incremental cost is $30,000. Therefore, the net incremental income is $0.

For Product B, the incremental revenue is $80,000-$40,000 = $40,000 and the incremental cost is $50,000. Therefore, the net incremental income is -$10,000.

For Product C, the incremental revenue is $70,000-$30,000 = $40,000 and the incremental cost is $45,000. Therefore, the net incremental income is -$5,000.

Based on these calculations, only Product A should be processed further as it has a net incremental income of $0. Processing Products B and C would result in a net loss. Therefore, the best choice is C) Product A only.

Mann Corporation Has a Joint Process, Which Produces Three Products