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Joint Cost and Utilization of Scarce Resources

a. The Dallas plant of Oscar Chemical processes talphazine into zetazine and gammazine. A batch consists of 20,000 gallons of talphazine, costing $11,000. Processing costs are $52,000 and results in 14,000 gallons of zetazine and 6,000 gallons bammazine. Raw material and processing costs are allocated to the tow products based on the number of gallons. Zetazine can be sold for $15/gallon. Bammazine can be sold for $9/gallon or it can be further processed into Meltazine. Meltazine can be sold for $12/gallon. Additional processing costs for a batch of meltazine for $15,500. Should Oscar sell bamazine or meltazine? Please explain.

b. Infant Company produces two products, A and B, with unit data as follows:

Selling Price $140 $200
Prime Costs 60 85
Overhead (70% fixed) 40 50

Machine Hours 2 3

Infant currently has insufficient machine hours to meet demand for its products. Which product, A or B, should receive priority in production and why?

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Revenue $54,000 $72,000
Added Cost ...

Solution Summary

The solution explains, through the use of calculations, the way that a manager chooses the product that is most profitable to produce. Emphasis is placed on the efficient use of scarce resources.