After fulfilling the demand for Air Court shoe, the excess capacity can be used to make the Air Max shoe • It depends on Relative use of capacity by the two products
Optimal Use of Limited Resources • Suppose the factory can produce seven instead of five Air max shoes per hour of machine time • Air Mac shoes are 26% more profitable than Air max (252 – 200)/200 = 26% AIR Court AIR Max Contribution from 10000 machine hours 10000*10*20=2000000 10000*7*36=2520000 Contribution per machine hour 2000000/10000 = 200 2520000 / 10000 = 252
Optimal Use of Limited Resources • In retail stores, the limiting factor is often floor space. The focus is on products taking up less space or on using the space for shorter periods of time. • Retail stores seek faster inventory turnover (the number of times the average inventory is sold per year).
Optimal Use of Limited Resources Regular Department Store Discount Department Store Retail Price $ 4 .00 $ 3.50 Costs of merchandise and other variable costs $ 3.00 $ 3.00 Contribution to profit per unit $ 1.00 (25%) $ .50 (14%) Units sold per year 10,000 22,000 Total contribution to profit, assuming the same space allotment in both stores $ 10,000 $ 11,000 Faster inventory turnover makes the same product a more profitable use of space in a discount store.
Learning Objective 5 Joint Product Costs : Sell or Process Further Decisions
Joint Product Costs
Joint Product Costs Joint Products: • Joint products have relatively significant sales values. • They are not separately identifiable as individual products until their split-off point. Split-off point • It is that juncture of manufacturing where the joint products become individually identifiable.
Joint Product Costs • Separable costs are any costs beyond the split-off point. • Joint costs are the costs of manufacturing joint products before the split-off point. Examples of joint products • chemicals, lumber, flour, and the products of petroleum refining.
Joint Product Costs • Suppose Dow Chemical Company produces two chemical products, X and Y, as a result of a particular joint process. • The joint processing cost is $100,000. • Both products are sold to the petroleum industry to be used as ingredients of gasoline.
Joint Product Costs
Illustration of Sell or Process Further • Suppose the 500,000 liters of Y can be processed further and sold to the plastics industry as product YA. • The additional processing cost would be $.08 per liter for manufacturing and distribution, a total of $40,000. • The net sales price of YA would be $.16 per liter, a total of $80,000.
Illustration of Sell or Process Further • Product X cannot be processed further and will sell it in the market at the split off point • Product Y should be sold or Can further be processed into YA? • Relevant information is the answer. • Joint costs : known as past costs and cannot affect anything beyond the split point. • Separable costs and revenues beyond the split point should be focussed
Illustration of Sell or Process Further Sell at Split- off as Y Process Further and Sell as YA Difference Revenues $30,000 $80,000 $50,000 Separable costs beyond split-off @ $.08 - 40,000 40,000 Income Effect $30,000 $40,000 $10,000
Illustration of Sell or Process Further
- Fall '19
- Limited Resources, Nantucket Nectars, Misspecified Costs
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