Product X-547 is one of the joint products in a joint manufacturing process. Management is considering whether to sell X-547 at
the split-off point or to process X-547 further into Xylene. The following data have been gathered: Selling price of X-547 Variable cost of processing X-547 into Xylene. The avoidable fixed costs of processing X-547 into Xylene. The selling price of Xylene. The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene?
1 answer:
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Answer:
a) $337,615.38
b-1) $360,910.85
b-2) $415,266.92
c-1) $362,637.36
c-2) $438,461.54
Explanation:
a) To find the current value of the company, we have:
=
= $337,615.38
b-1) If the company takes on debt equal to 30 percent of its unlevered value.
337,615.38 + (0.23 * 337,615.38 * 0.30)
= $360,910.85
b-2) When the company can borrow at 10 percent. The value of the firm if the company takes on debt equal to 100 percent of its unlevered value will be:
337,615.38 + (0.23 * 337,615.38 * 1)
= $415,266.92
c-1) The value of the firm if the company takes on debt equal to 30 percent of its levered value:
= $362,637.36
c-2) The value of the firm if the company takes on debt equal to 100 percent of its levered value:
= $438,461.54