Question 13

CF Ltd manufactures two cleaning fluids, X and Y. the two fluids are manufactured in a joint process. Every 8,000 litres of materials input to the joint process produces 4,000 litres of X and 3,200 of Y. the cost of processing are as follows:

GHS

Direct material 1,600

Direct labour 200

Variable production overhead 300

Fixed production overhead 2000

Product X sell for GHS1.10 per litre and product Y for GHS0.75 per litre. CF Ltd could put product X through another production process, where there is spare is spare production capacity. The further processing would produce another cleaning product, Zplus. Every one litre of input to the further process will produce 0.90 litres of Zplus. The costs of further processing would be:

Product X: 4,000 litres

GHS

Additional materials 400

Direct labour 40

Variable overheads 80

Apportioned fixed overheads 400

Total 920

Zplus would sell for GHS1.40 per litre

Required

Using financial reasons only to justify the decision, should the company sell product X or should it further process the product to make Zplus? Assume for the purpose of the analysis that direct labour is a variable cost.