Western, Corp., produces two products, cigars and chewing tobacco, from a joint process involving the processing of tobacco leaves. Joint costs are $60,000 for this process, and yield 2,000 pounds of cigars and 4,000 pounds of chewing tobacco. Cigars sell for $80 per pound, and chewing tobacco sells for $20 per pound. Cigars require $80,000 in separable costs, while chewing tobacco requires $50,000 in separable costs. Chewing tobacco can be processed further (for $30,000 in additional separable costs) into a mint-flavored premium chewing tobacco that would sell for $30 per pound.
1. Should Western process chewing tobacco into premium chewing tobacco?
2. What is the maximum amount that joint costs can increase before (a) it would not be better to process chewing tobacco further into premium chewing tobacco, and (b) it would be better to cease processing tobacco leaves to produce cigars and premium chewing tobacco?

  • CreatedNovember 19, 2014
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