Pure Paint Company has been known for years for its two excellent interior wall paints: Nice & Smooth and Rich & Thick. The company has discovered that by processing Rich & Thick further it could produce a slightly different paint.
Nice & Smooth and Rich & Thick are produced jointly at a cost of $200,000, which is allocated equally between them. If Rich & Thick were processed further, its selling price would increase by $1.75 per unit, and the additional cost per unit would be $1.25.
1. On the basis of the information given (and disregarding qualitative factors), should the company process Rich & Thick further? Do you have enough information to make a recommendation? Explain.
2. Interpretive Question: Is the joint cost of $200,000 relevant to this discussion? Why or why not?