Question
3 (15 marks) BP Oil produces 3 products from a joint production process. The 3 products are motor oil, regular gasoline, and diesel fuel. Each
3 (15 marks) BP Oil produces 3 products from a joint production process. The 3 products are motor oil, regular gasoline, and diesel fuel. Each product can be sold at the split off point in annual amounts as shown below: Motor oil - 10,000 litres at a selling price of $5.00 per litre Regular gasoline-100,000 litres at a selling price of $1.50 per litre Diesel fuel - 80,000 litres at a selling price of $1.25 per litre All 3 products could be processed further and then sold for a higher price per litre. Motor oil could be further processed into a product called WD40 (at an incremental cost of $0.50 per litre produced) which could then be sold for $7.50 per litre. However, this process would only produce 8,000 litres of WD40 and the remaining 2,000 litres of motor oil would be tainted and have to be discarded at a cost of $1.00 per litre. Regular gasoline could be processed into 100,000 litres of premium gasoline and sold for $2.00 per litre. Additional processing costs would be $0.50 per litre. Diesel fuel could be processed further into 80,000 litres of jet fuel and sold for $2.50 per litre. Additional processing costs would be $0.75 per litre. Due to increased storage and processing costs for jet fuel, an additional manager is necessary to produce jet fuel at an annual cost of $60,000. The joint processing costs incurred prior to the split off point amount to $200,000 and are allocated to motor oil, regular gasoline and diesel fuel using the By-product method using Net Realizable Value. Required Which products should be sold at the spit-off point and which ones should be processed further? Show your calculations
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