Nor-Pharma AS manufactures three joint products from a joint process: Altox, Lorex and Hycol. Data regarding these products for the fiscal year ended 31 May 2018 are as follows: 

 The joint production cost up to the split-off point where Altox, Lorex and Hycol become separable products is €180,0000 (which includes the €17,500 disposal costs for Dorzine as described below). 

The president of Nor-Pharma, Gro Seljord, is reviewing an opportunity to change the way in which these three products are processed and sold. Proposed changes for each product are as follows: 

● 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 Nor-Pharma as a cold remedy. The company has received an offer from another pharmaceutical company to purchase 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. Nor Pharma’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% more units of product. The final product would be sold for €1.80 per unit. 

The joint process currently used by Nor-Pharma also produces 50,000 units of Dorzine, a hazardous chemical waste product. The company pays €0.35 per unit to dispose of the Dorzine properly. Nor-Chem, AS, is interested in using the Dorzine as a solvent; however, Nor-Pharma would have to refine the Dorzine at an annual cost of €43,000. Nor-Chem would purchase all the refined Dorzine produced by Nor-Pharma and is willing to pay €0.75 for each unit. 

Instructions 

Form groups of two or more students to complete the following requirements. 

Required 

1. Allocate the €1,800,000 joint production cost to Altox, Lorex and Hycol using the estimated NRV method. 

2. Identify which of the three joint products Nor-Pharma should sell at the split-off point in the future and which of the three main products the company should process further in order to maximise profits. Support your decisions with appropriate calculations. 

3. Assume that Nor-Pharma has decided to refine the waste product Dorzine for sale to NorChem and will treat Dorzine as a by product of the joint process in the future. 

a. Evaluate whether Nor-Pharma made the correct decision regarding Dorzine. Support your answer with appropriate calculations. 

b. Explain whether the decision to treat Dorzine as a by-product will affect the decisions reached in requirement 2.

Transcribed Image Text:

Altox Lorex Hycol Units produced Selling price per unit at split-off Separable costs Final selling price per unit 170 000 500 000 330 000 €3.50 €2.00 €1 400 000 €5.00