Goodson Pharmaceutical Company manufactures three main products from a joint process:

Altox, Lorex, and Hycol. Data regarding these products for the fiscal year ended May 31, 2001, are shown below.

The president of Goodson, Arlene Franklin, is reviewing an opportunity to change the way in which these three products are processed and sold. Proposed changes for each prod¬
uct are described below.
Altox is currently sold at the split-off point to a manufacturer of vitamins. Altox can also be refined for use as a medication to treat high blood pressure; however this additional processing would cause a loss of 20,000 units of Altox. The separable costs to further process Altox are estimated to be $250,000 annually. The final product would sell for $5.50 per unit.
Lorex is currently processed further after the split-off point and sold by Goodson as a cold remedy. The company has received an offer from another pharmaceutical company to pur¬
chase Lorex at the split-off point for $2.25 per unit.
Hycol is an oil produced from the joint process and is currently sold at the split-off point to a cosmetics manufacturer. Goodson's Research Department has suggested that the company process this product further and sell it as an ointment to relieve muscle pain. The additional processing would cost $75,000 annually and would result in 25 percent more units of product. The final product would be sold for $1.80 per unit.
The joint process currently used by Goodson also produces 50,000 units of Dorzine, a hazardous chemical waste product. The company must pay $0,035 per unit to properly dis¬
pose of the Dorzine. Dietriech Mills, Inc., is interested in using the Dorzine as a solvent;
however, Goodson would have to refine the Dorzine at an annual cost of $43,000. Dietriech would purchase all the refined Dorzine produced by Goodson and is willing to pay $0.75 for each unit.
Required:
1. Identify which of the three main products Goodson Pharmaceutical Company should sell at the split-off point in the future and which of the three main products the com¬
pany should process further in order to maximize profits. Be sure to support your de¬
cisions with appropriate calculations.
2. Assume the Goodson Pharmaceutical Company has decided to refine the waste prod¬
uct Dorzine for sale to Dietriech Mills, Inc., and will treat Dorzine as a by-product of the joint process in the future.

a. Evaluate whether Goodson made the correct decision regarding Dorzine, support¬
ing your answer with appropriate calculations.

b. Explain whether the decision to treat Dorzine as a by-product will affect the deci¬
sions reached in Requirement 2a above. (CMA adapted)

Transcribed Image Text:

Altox Lorex Hycol Units produced 170,000 500,000 330,000 Sales value per unit at split-off $3.50 $2.00 Allocation of joint costs* $450,000 $846,000 $504,000 Separable costs $1,400,000 Final sales value per unit $5.00 "Joint costs are allocated on the basis of net realizable value, and the net realizable value of any by-product is deducted from the joint costs before allocation.