Butry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals: dac and tyl. One batch of 5,000 L of dactylyte can be converted to 2,000 L of dac and 3,000 L of tyl at a total joint processing cost of $12,000. At the split-off point, dac can be sold for $3 per litre and tyl can be sold for $4 per litre. Butry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 L of prodac for every 2,000 L of dac. Prodac sells for $5 per litre.
-Refer to the Figure.Should Butry process dac further or sell now,and what will be the effect on income?
A)Do not process further, because income will be $5,000 lower.
B)Do not process further, because income will be $1,500 lower.
C)Process further, because income will be $1,500 higher.
D)Process further, because income will be $5,000 higher.

Question

Quizplus · Accepted Answer

If the company sells 2,000 L of dac, it would receive $6,000 ($3 per litre). And if it sells 3,000 L of tyl, it would receive $12,000 ($4 per litre). Thus, the total revenue would be $18,000.

Alternatively, if the company processes 2,000 L of dac into prodac, it would spend $4,000 on the new process and would get 1,700 L of prodac. The total revenue from selling this prodac would be $8,500 ($5 per litre). Adding the revenue from selling 3,000 L of tyl, the total revenue would be $20,500.

Therefore, processing further would increase the total revenue by $2,500 ($20,500 - $18,000). However, the processing cost of $4,000 needs to be subtracted from this increase in revenue, resulting in a net decrease in income of $1,500 ($2,500 - $4,000). Thus, the best choice is not to process further and to sell the dac and tyl as they are.

Butry Company Manufactures Veterinary Products