Advanced: Calculation of joint product costs and the evaluation of an incremental order Rayman Company produces three chemical products, J1X, J2Y and BIZ. Raw materials are processed in a single plant to produce two inter¬ mediate products, J1 and J2, in fixed proportions. There is no market for these two intermediate products. J1 is processed further through process X to yield the product J1X, product J2 is converted into J2Y by a separate finishing process Y. The Y finishing process produces both J2Y and a waste material, Bl, which has no market value. The Rayman Company can convert Bl, after additional processing through process Z, into a saleable by¬ product, BIZ. The company can sell as much BIZ as it can produce at a price of £1.50 per kg.

At normal levels of production and sales, 600000 kg of the common input material are processed each month. There are 440000 kg and 110000 kg respectively, of the intermediate products J1 and J2, produced from this level of input. After the separate finishing processes, fixed proportions of J1X, J2Yand BIZ emerge, as shown below with current market prices (all losses are normal losses):

Selling and administrative costs are entirely fixed and cannot be traced to any of the three products.
Required:

(a) Draw a diagram which shows the flow of these products, through the processes, label the diagram and show the quantities involved in normal operation. (2 marks)

(b) Calculate the cost per unit of the finished products J1X and J2Y and the total manufacturing profit, for the month, attributed to each product assuming all joint costs are allocated based on:

(c) A new customer has approached Rayman wishing to purchase 10000 kg of J2Y for £4.00 per kg. This is extra to the present level of business indicated above.
Advise the management how they may respond to this approach by:
(i) Developing a financial evaluation of the offer. (4 marks)
(ii) Clarifying any assumptions and further questions which may apply.

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Product Quantity kg Market Price per kg J1X 400 000 2.425 J2Y 100 000 4.50 BIZ 10000 1.50 At these normal volumes, materials and processing costs are as follows: Common Separate Finishing Processess Plant Facility X Y Z (000) (000) (000) (000) Direct materials 320 110 15 1.0 Direct labour 150 225 90 5.5 Variable overhead 30 50 25 0.5 Fixed overhead 50 25 5 3.0 Total 550 410 135 10.0