Geneva Powder Company produces body powders in batches. Each type of powder can be sold in its current condition or processed further and specialized for high-priced department stores. Joint processing costs are $200,000. Data concerning the various products appear below:Type of PowderNumber of Pounds Price per Poundat Split-Off Further Processing Costs Price after Processing FurtherCosmetic Powder 200,000 $10 $150,000 $11.50 Medicated Powder 400,000 $8 $60,000 $8.40 Baby Powder 50,000 $5 $80,000 $5.50 Required:(a) Determine which products should be sold at split-off and which should be processed further.(b) The Regis Department Store approaches Geneva Powder. Regis would like Geneva Powder to process Baby Powder into a special powder for its infants
department. At what price per pound would Geneva Powder be economically indifferent between selling the powder at the split-off point and processing it further for Regis?
What will be an ideal response?
a.
| Product | Revenue at Split-Off | Revenue to Process Further | Processing Costs | Net Revenue After Processing | |||||||||||
| Cosmetic Powder | $ | 2,000,000 | $ | 2,300,000 | $ | 150,000 | $ | 2,150,000 | |||||||
| Medicated Powder | $ | 3,200,000 | $ | 3,360,000 | $ | 60,000 | $ | 3,300,000 | |||||||
| Baby Powder | $ | 250,000 | $ | 275,000 | $ | 80,000 | $ | 195,000 | |||||||
The company should process the Cosmetic and Medicated Powders further since the net revenue after further processing exceeds the revenue at split-off. Baby Powder should be sold at the split-off point.
(b) Geneva Powder would be economically indifferent at a selling price of $6.60 for the Baby Powder. There is currently an advantage of $55,000 for the company to sell Baby Powder at the split-off point ($250,000 ? 195,000). With 50,000 pounds of Baby Powder produced, the additional selling price per pound needed to generate the same net revenues by processing further is $1.10 ($55,000/50,000). The current selling price after further processing is $5.50. The selling price to be economically indifferent would be $5.50 + $1.10 = $6.60.
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