Question: Milwaukee Specialty Chemical Company (MSCC) is a
Milwaukee Specialty Chemical Company (MSCC) is a diversified chemical processing company. The firm manufactures swimming pool chemicals, chemicals for metal processing, specialized chemical compounds, and pesticides.
Currently, the Noorwood plant is producing two derivatives, RNA–1 and RNA–2, from the chemical compound VDB developed by the company’s research labs. Each week 1,200,000 pounds of VDB are processed at a cost of $393,600 into 800,000 pounds of RNA–1 and 400,000 pounds of RNA–2. The proportion of these two outputs cannot be altered, because this is a joint process. RNA–1 has no market value until it is converted into a pesticide with the trade name Fastkil. Processing RNA–1 into Fastkil costs $384,000. Fastkil wholesales at $80 per 100 pounds.
RNA–2 is sold as is for $128 per hundred pounds. However, management has discovered that RNA–2 can be converted into two new products by adding 400,000 pounds of compound LST to the 400,000 pounds of RNA–2. This joint process would yield 400,000 pounds each of DMZ–3 and Pestrol, the two new products. The additional direct-material and related processing costs of this joint process would be $192,000. DMZ–3 and Pestrol would each be sold for $92.00 per 100 pounds. The company’s management has decided not to process RNA–2 further based on the analysis presented in the following schedule.
Required:
Evaluate MSCC’s management’s analysis, and make any revisions that are necessary. Your critique and analysis should indicate:
a. Whether management made the correct decision.
b. The gross savings or loss per week resulting from the decision not to process RNA–2 further, if different from management’s analysis.
Transcribed Image Text:
Process Further RNA-2 DMZ-3 Pestrol Total Production in pounds 400,000 400,000 400,000 Revenue $512,000 $368,000 $368,000 $736,000 Costs: VDB costs $131,200* $ 98,400 $ 98,400 $196,800t Additional direct materials (LST) and processing of RNA–2 96,000 96,000 192,000 Total costs . $131,200 $194,400 $194,400 $388,800 Weekly gross profit $380,800 $173,600 $173,600 $347,200 "$131,200 is one-third of the $393,600 cost of processing VDB. When RNA-2 is not processed further, one-third of the final output is RNA-2 (400,000 out of a total of 1,200,000 pounds). 1$196,800 is one-half of the $393,600 cost of processing VDB. When RNA-2 is processed further, one-half of the final output consists of DMZ-3 and Pestrol. The final products then are: 800,000 pounds of RNA-1; 400,000 pounds of DMZ-3; and 400,000 pounds of Pestrol.
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