Larry, Inc. produces two products that are purchased andconsumed by upscale high-end gourmets. Larry harvests rotten-logfungi which grow in Larry’s rotten-log lot in the middle of theforest. The fungi are processed into pre-goop and pre-slop whichare identified at the split off point and can be sold for $50 and$60 per pound, respectively. The joint costs are $360,000, and thejoint process yielded 5,000 pounds of Goop and 3,000 pounds ofSlop.
It costs $15 per pound to process pre-goop into Goop which sellsfor $60 per pound, and it costs $20 per pound to process pre-slopinto Slop which sells for $90 per pound. Assume that there is thesame weight of pre-goop and pre-slop as the finished products Goopand Slop.
Required:
1. To maximize profit, which productshould be processed further and then sold? Which product should besold at the split-off point? Show your work.
2. What amount of joint costs will beallocated to each product if the sales value at split off method isused?
3. The current joint costs of $360,000consists of $120,000 fixed and $240,000 variable costs. The newenvironmental regulation will increase the joint cost in the nextyear by $80,000, which are all fixed. Does it affect your decisionmade in 1)?
