Under examination conditions this question would be allocated approximately 18 minutes. NLM uses a common process to manufacture three joint products: X, Y and Z. The costs of operating the common process total $75,400 each month. This includes $6,800 of apportioned head office costs. The remaining costs are specific to the common process and would be avoided if it were discontinued. Common costs are apportioned to the joint products on the basis of their respective output volumes.

The normal monthly output from the common process is:

X 4,000 litres

Y 5,000 litres

Z 4,500 litres

There are a number of manufacturers of products that are identical to products X, Y and Z and as a result there is a competitive market in which these products can be bought and sold at the following prices:

X $5.00 per litre

Y $4.50 per litre

Z $5.50 per litre

Currently NLM uses the output from the common process as input to three separate processes where X, Y and Z are converted into SX, SY and SZ. The specific costs of these further processes (which are avoidable if the further process is discontinued) are as follows:

X to SX $1.25 per litre plus $1,850 per month

Y to SY $1.80 per litre plus $800 per month

Z to SZ $1.55 per litre plus $2,400 per month

The market selling prices of the further processed products are:

SX $6.75 per litre

SY $7.50 per litre

SZ $7.20 per litre

Required:

(a) Advise NLM as to which (if any) of the further processes should continue to be operated.

State any relevant assumptions.

(b) Advise NLM whether they should continue to operate the common process. State any relevant assumptions.