Question:
Refinery Ltd buys crude oil which is refined, producing liquefied gas, oil and grease. The cost of crude oil refined in the past year was £105,000 and the refining department incurred processing costs of £45,000. The output and sales for the three products during that year were as follows:
|
Product
|
Units of output
|
Sales value
£
|
Additional
processing costs
£
|
|
Liquefied gas
|
10,000
|
20,000
|
12,000
|
|
Refined oil
|
500,000
|
230,000
|
60,000
|
|
Grease
|
5,000
|
8,000
|
-
|
The company could have sold the products at the split-off point directly to other processors at a unit selling price of 50p, 35p and £1.60 respectively.
Required
(1) Compute the net profit earned for each product using two suitable methods of joint cost allocation.
(2) Determine whether it would have been more or less profitable for the company to have sold certain products at split-off without further processing.