Part E Relevant Costs Sell Or Process Further Farrugia Corpo

Part E Relevant Costsell Or Process Furtherfarrugia Corporation Prod

Part E: Relevant Cost/Sell or Process Further Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64. 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 the common input into the end products X and Y? Show your work! b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain. Part F: Relevant Cost/Dropping a Product The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system appear below: Sales ................................................................ Variable expenses............................................ Fixed manufacturing expenses ........................ Fixed selling and administrative expenses ...... $150,000 $72,000 $50,000 $33,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued. A. According to the company's accounting system, what is the net operating income earned by product V86O? B. What would be the effect on the company's overall net operating income if product V86O were dropped?

Paper For Above instruction

Introduction

Analyzing managerial decisions related to product processing and discontinuation involves understanding relevant costs and benefits. This paper explores two decision scenarios faced by Farrugia Corporation and Woznick Corporation, respectively. The first scenario considers whether to process intermediate products further into end products, assessing profitability. The second examines whether discontinuing a product will enhance overall net operating income based on relevant cost analysis. These evaluations highlight the application of relevant costing principles in strategic decision-making.

Scenario 1: Processing Intermediate Products A and B

Farrugia Corporation produces two intermediate products, A and B, sourced from a common input. The key decision revolves around whether it is more profitable to sell these intermediates as is or to process them further into end products X and Y. The costs and selling prices provided inform a comparison to determine the optimal choice.

Cost and Revenue Analysis

The common input costs $36 per batch, with an additional processing cost of $15 per batch to produce intermediates A and B. The selling prices for the intermediates, if sold without further processing, are $21 for product A and $44 for product B. Processing further into end products results in additional costs: $14 for X, which sells for $32, and $28 for Y, which sells for $64.

Profit Calculation for Processing and Selling as End Products

To analyze profitability, we should consider the total costs and revenues both for direct sale of the intermediates and for their processing into final products.

• Batch Cost: $36 (purchase) + $15 (processing) = $51
• Sale of intermediates: $21 for A, $44 for B
• Further processing costs: $14 for X, $28 for Y
• Sale prices of end products: $32 for X, $64 for Y

Calculations

For intermediate A:

• Selling as is: $21 - $51 (cost) = -$30 (loss)
• Processing further: Selling price $32 - total cost ($36 + $15 + $14) = $32 - $65 = -$33 (loss)

However, this direct calculation suggests a negative margin. But the key is to evaluate the incremental benefit of processing further:

Incremental revenue from processing A: $32 - $21 = $11

Incremental cost: $14 (processing cost)

Profit from processing A: $11 - $14 = -$3 (loss)

Similarly, for B:

• Selling as is: $44 - $51 (cost) = -$7 (loss)
• Processing further: $64 - $44 = $20

  Incremental processing cost: $28

  Incremental profit: $20 - $28 = -$8 (loss)

But considering the overall approach, the more straightforward method is to look at the net contribution margin implications:

Profit from Batch Processing

Using the revenue and costs:

• Selling intermediates A and B directly: $21 + $44 = $65
• Cost of batch: $36 + $15 = $51
• Net profit if sold as is: $65 - $51 = $14

For processing:

• Cost of processing plus batch: $36 + $15 = $51
• Revenue from end products: $32 + $64 = $96
• Profit from processing and selling: $96 - $51 = $45

However, this calculation indicates a higher profit when processing, which suggests that processing is favorable.

Conclusion for Part A

The company makes a net profit of $45 from processing one batch into products X and Y, as this yields the highest margin compared to selling intermediates directly. Therefore, processing both intermediates into their final products is financially advantageous.

Part B: Should Products A and B be Processed Further or Sold as Is?

Based on the analysis, both intermediates A and B should be processed further into end products. The incremental comparison shows that processing yields higher profitability ($45) per batch than selling intermediates directly ($14), making further processing the better strategic choice.

Scenario 2: Discontinuing Product V86O

Understanding the Financial Impact

Woznick Corporation’s decision to discontinue product V86O depends on assessing relevant costs and benefits. The provided data include sales, variable expenses, fixed manufacturing, and fixed selling expenses—some of which are avoidable if the product is dropped. The core question lies in whether the contribution lost due to discontinuation outweighs fixed expenses that can be avoided.

Analysis Using Relevant Costs

Part A: Net Operating Income from V86O

Total sales: $150,000

Variable expenses: $72,000

Contribution margin: $150,000 - $72,000 = $78,000

Allocated fixed expenses: $50,000 fixed manufacturing + $33,000 fixed selling = $83,000, fully allocated.

Net operating income according to the full allocation: Sales minus all expenses = $150,000 - ($72,000 + $50,000 + $33,000) = -$5,000, indicating a loss.

Part B: Impact of Dropping V86O

Adjusting for avoidable fixed expenses:

- Avoidable fixed manufacturing: $30,000

- Avoidable fixed selling: $13,000

Contribution margin that V86O contributes is $78,000, but reallocating fixed costs shows that the main loss stems from fixed expenses that will remain or be saved.

The net impact of discontinuing V86O would be:

- Loss of contribution margin: $78,000

- Savings in fixed expenses: $30,000 + $13,000 = $43,000

Resulting net change: -$78,000 + $43,000 = -$35,000

Discontinuing the product would decrease overall net operating income by $35,000, indicating that continuing V86O is financially preferable.

Conclusion

Based on relevant costing analysis, discontinuing product V86O would negatively impact the company's overall profitability, as the contribution margin lost is not fully offset by the fixed expenses that can be avoided. Therefore, the company should continue production of V86O.

Conclusion

Strategic decisions regarding whether to process products further or discontinue them should always incorporate relevant costs and contribution margins. The analysis of Farrugia Corporation demonstrates that processing intermediates into final products yields higher profitability, while Woznick Corporation’s analysis indicates that continuing a product that contributes positively to profit is advantageous. Managers must carefully evaluate incremental revenues and costs to optimize financial performance and make informed strategic choices.

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