Reference no: EM133175959
Question - Manufactures two types of cold-pressed olive oil, Refined Oil and Top Quality Oil, out of a joint process. The joint (common) costs incurred are $88,950 for a standard production run that generates 26,400 gallons of Refined Oil and 13,200 gallons of Top Quality Oil. Additional processing costs beyond the split-off point are $2.55 per gallon for Refined Oil and $2.05 per gallon for Top Quality Oil. Refined Oil sells for $4.45 per gallon, while Top Quality Oil sells for $8.60 per gallon.
MangiareBuono, a supermarket chain, has asked Fiorello to supply it with 26,400 gallons of Top Quality Oil at a price of $8.4 per gallon. MangiareBuono plans to have the oil bottled in 16-ounce bottles with its own MangiareBuono label.
If Fiorello accepts the order, it will save $0.20 per gallon in packaging of Top Quality Oil. There is sufficient excess capacity for the order. However, the market for Refined Oil is saturated, and any additional sales of Refined Oil would take place at a price of $3.22 per gallon. Assume that no significant non- unit-level activity costs are incurred.
Required -
1. What is the profit normally earned on one production run of Refined Oil and Top Quality Oil?
2. Should Fiorello accept the special order?
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