kit FURNIVAL

FURNIVAL
Furnival has a distillation plant that produces three joint products, P, Q and R, in the
proportions 10:5:5. After the split?off point the products can be sold for industrial use or
they can be taken to the mixing plant for blending and refining. The latter procedure is
normally followed.
For a typical week, in which all the output is processed in the mixing plant, the following
income statement can be prepared:
Product P Product Q Product R
Sales volume (gallons) 1,000 500 500
Price per gallon ($) 12.50 20 10
Sales revenue ($) 12,500 10,000 5,000
–––––– –––––– ––––––
Joint process cost ($)
(apportioned using output volume) 5,000 2,500 2,500
Mixing plant cost ($):
Process costs 3,000 3,000 3,000
Other separable costs 2,000 500 500
–––––– –––––– ––––––
Total costs ($) 10,000 6,000 6,000
–––––– –––––– ––––––
Profit/(loss) ($) 2,500 4,000 (1,000)
–––––– –––––– ––––––
The joint process costs are 25% fixed and 75% variable, whereas the mixing plant costs are
10% fixed and 90% variable and all the ‘other separable costs’ are variable.
If the products had been sold at the split?off point the selling price per gallon would have
been:
Product P Product Q Product R
$5.00 $6.00 $1.50
There are only 45 hours available per week in the mixing plant. Typically 30 hours are taken
up with the processing of Product P, Q and R (10 hours for each product line) and 15 hours
are used for other work that generates (on average) a profit of $200 per hour after being
charged with a proportionate share of the plant’s costs (including fixed costs). The
manager of the mixing plant considers that he could sell all the plant’s processing time
externally at a price that would provide this rate of profit.
It has been suggested:
(i) that, since Product R regularly makes a loss, it should be sold off at the split?off point
(ii) that it might be possible advantageously to change the mix of products achieved in
the distillation plant. It is possible to change the output proportions to 7:8:5 at a cost
of $1 for each additional gallon of Q produced by the distillation plant.
Required:
Compare the costs and benefits for each of the above proposals. Recommend, for each
proposal, whether it should or should not be implementented

sir in above the question i think we need to include fixed cost as cost if we need to get a profit of 200/hr, but in question not told the fixed cost absorbed on the basis of labour hour and why we include it on this basis