Mystic Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000.
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QV3
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VX7
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HM4
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LZ9
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Number of ounces per batch
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100
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80
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125
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195
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Cost of processing further
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$2400
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$400
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$2500
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$2800
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Selling price of unprocessed intermediate product/ounce
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$62
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$49
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$102
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$47
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Selling price of final product after further processing/ounce
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$85
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$57
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$127
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$61
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Required:
1.) Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product.
2.) To maximize firm value, which of the joint products should be processed further and which should be sold without further processing?
3.) Based on your analysis in part 2 regarding the decisions to process further or not, should Mystic Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mystic Herbals makes per batch.
4.) Suppose the joint cost of $30,000 is allocated using the new realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value.
5.) Explain how the use of joint cost allocations enhances or harms the decision to process joint products.