Chapter 8, Problem 66P

Sell at Split-Off or Process Further

Eunice Company produces two products from a joint process. Joint costs are $70,000 for one batch, which yields 1,000 liters of germain and 4,000 liters of hastain. Germain can be sold at the split-off point for $24 or be processed further, into geraiten, at a manufacturing cost of $4,100 (for the 1,000 liters) and sold for $33 per liter.

If geraiten is sold, additional distribution costs of $0.80 per liter and sales commissions of 10% of sales will be incurred. In addition, Eunice’s legal department is concerned about potential liability issues with geraiten—issues that do not arise with germain.

Required:

1. 1. CONCEPTUAL CONNECTION Considering only gross profit, should germain be sold at the split-off point or processed further?
2. 2. CONCEPTUAL CONNECTION Taking a value-chain approach (by considering distribution, marketing, and after-the-sale costs), determine whether or not germain should be processed into geraiten.