Question

Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch. A batch of sugar beets costs $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 $27 or processed further for $16 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Which of the intermediate products should be processed further?

Answer 1

Answer:

The Beet Juice should be processed further

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 point of crush are irrelevant to the decision to process further  

Product          Additional Rev.     Further process cost.     Net income(loss) ($)

Beet Fiber       40-27 =13                     16                              (3) See notes

Beet Juice       100- 43 = 57                28                              29

The beet fiber should not be process further while the beet juice should be be processed further into refined sugar . Processing Beet Juice further will generate additional income of $29 per unit  while Beet Fiber would generate a loss of  $(3)

Notes

The net income(loss) is the difference between the additional revenue from further processing and the further processing cost. The Net income(loss) for the two products is computed as follows:

Beet Fiber  =13- 16 = (3)

Beet Juice  = 57 - 28 = 29