Colombia Chemical Company is a highly diversified chemical processing company. The company manufactures swimming pool chemicals, chemicals for metal processing companies, specialized chemical compounds for other companies, and a full line of pesticides and insecticides.
Currently, the Noorwood plant is producing two derivatives, RNA-1 and RNA-2, from the chemical compound VDB, developed by the company's research labs. Each week 1,200,000 pounds of VDB are processed at a cost of $246,000 into 800,000 pounds of RNA-1 and 400,000 pounds of RNA-2. The proportions of the two outputs cannot be altered. RNA-1 has no market value until it is converted into a product with the trade name Fastkil. The cost to process RNA-1 into Fastkil is $240,000. Fastkil wholesales at $50 per 100 pounds.
RNA-2 is sold as is for $80 per hundred pounds. However, the company has discovered that RNA-2 can be converted into two new products through further processing. The further processing requires the addition of 400,000 pounds of compound LST to the 400,000 pounds of RNA-2. This additional joint process yields 400,000 pounds each of DMZ-3 and Pestrol-two new products. The additional raw materials and related processing costs are $120,000. DMZ-3 and Pestrol can each be sold for $57.50 per 100 pounds. Management has decided not to process RNA-2 further, based on the preceding analysis. The company uses the average unit cost method to allocate costs arising from joint processing.
A new staff accountant, after reviewing the analysis, comments that it should be revised, stating: "Product costing of products such as these should be done on a market value basis, not an average unit cost basis."

Required:
(1) Discuss whether the use of the market value method provides data that are more relevant for the decision to market DMA-3 and Pestrol.
(2) Critique the company's analysis and make any revisions that are necessary. The critique and analysis should indicate:
(a) Whether the company made the correct decision.
(b) What the gross savings (loss) per week will be as a result of the decision not to process RNA-2 further (if different from the company's analysis).

Transcribed Image Text:

Sells as RNA-2 Process Further Pestrol 400,000 Total DMZ-3 400,000 Production in pounds. Revenue 400,000 5320.000 $230,000 $230.000 S460,000 .. Costs: VDB cost $82,000 61,500 $61,500 $123,000 … Additional raw materials (LST Total cost.... Weekly gross profit.. If RNA-2 is sold as is, the allocation basis is 1,200,000 pounds; if RNA-2 is processed fur- 60,000120.000 皇121,500 $121,500 $243,000 and processing of RNA-2 $.82,000 238,000 108,500 108,500 $217000 ther, the allocation basis is 1,600,000 pounds for VDB cost.