Question

Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $52 to buy from farmers and $11 to crush in the company's plant. Two intermediate products, beet fiber, and beet juice emerge from the crushing process. The beet fiber can be sold as is for $16 or processed further for $15 to make the end product industrial fiber that is sold for $64. The beet juice can be sold as is for $47 or processed further for $19 to make the end product refined sugar that is sold for $64.
What is the financial advantage (disadvantage) for the company from processing one batch of sugar beets into the end products industrial fiber and refined sugar rather than not processing that batch at all?

Answer 1

Answer:

$31

Explanation:

The incremental revenue and cost is calculated as stated below to arrive at the financial advantage

                              Beet Fiber          Beet Juice

Un processesd        16                         47                         63

Processed                64                         64                       128

Cost of further         15                         19                          34

Processing

Financial advantage = Incremental revenue - incremental cost

= 128-(63+24)= 31

Financial advantage from further processing    $31

However , i will like to mention that the financial advantage could have increased by $2 if the Beet juice is not processed further as the incremental cost is more than incremental revenue

Answer 2

Answer

Financial advantage from further processing    $31

Explanation:

A company should process further a product if the additional revenue from the split-off point is greater than than the further processing cost.  

Also note that all cost incurred up to the split-off point (the cost of crushing) are irrelevant to the decision to process further .  

                                                                                                    $

Sales revenue after the split off point( 64+64)                       128

Sales revenue at the split-off point (16+47)                             63

Additional sales revenue                                                          65

Further processing cost ( 15+19)                                              (34 )

Net income after further processing                                        31

Financial advantage from further processing    $31