1. Prevatte Corporation purchases potatoes from farmers. The potatoes are then peeled, producing...
Question:
1. Prevatte Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. The depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $42 to buy from farmers and $10 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $24 or processed further for $15 to make the cocktail of nutrients that are sold for $44. The depeeled spuds can be sold as is for $35 or processed further for $24 to make frozen french fries that are sold for $56.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? (Input the amount as a positive value. Omit the "$" sign in your response.)
Loss or Profit $ _____
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? (Loss amounts should be indicated with a minus sign. Omit the "$" sign in your response.)
Cocktail of Organic Nutrient Incremental Profit (loss) from further processing $ _____
Frozen French Fries Incremental Profit (loss) from further processing $ _____
Cocktail of Organic Nutrients
Yes
No
Frozen French Fries
Yes
No
Relevant Costs to Selling or Processing Materials Further:
In selling-or-processing-further decisions, any joint processing costs are sunk costs and should not be considered relevant to the decision. The only relevant costs are incremental processing costs.
Answer and Explanation: 1
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(a)
The income from one batch is:
| Sales revenue Cocktail | 44 |
| ... French Fries | 56 |
| Costs | |
| Purchase price potatoes | 42 |
| Cost of peeling | 10 |
| Processing... |
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Relevant Costs to Selling or Processing Materials Further
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Chapter 9 / Lesson 10
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Balancing costs in relation to selling or processing materials further will depend on how the other aspects of production are performing. Learn more about whether to sell or process materials further, considering relevant costs, making a decision and relevant examples.
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