A Company Puts Four Products Through a Common Production Process

question 88

Essay

A company puts four products through a common production process.This process costs $100,000 each year.The four products can be sold when they emerge from this process at the "split-off point", or processed further and then sold.Data about the four products for the coming period are:

$\begin{array} { l r r r r } && \text { Unit Sales }& \text {Unit Sales}\\&& \text {Price per}& \text { Price per}\\&& \text {Pound}& \text { Pound}& \text { Additional}\\&& \text {at Split-Off }& \text {after Further }& \text {Processing}\\\underline {\text { Product } }& \underline {\text { Volume } }& \underline {\text { Point } }&\underline { \text { Processing }} & \underline {\text { Costs }} \\ \text { Singer } & 20,0001 \mathrm { l } & \$ 28.00 & \$ 42.00 & \$ 400,000 \\ \text { Talker } & 10,0001 \mathrm {~b} & 7.00 & 28.00 & 144,000 \\ \text { Walker } & 5,0001 \mathrm { lb } & 36.00 & 58.00 & 120,000 \\ \text { Sayer } & 5,0001 \mathrm { lb } & 18.00 & 22.00 & 40,000 \end{array}$ Determine which products should be sold at the split-off point and which should be processed further.

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Definitions:

Miller-Orr Model

A financial model that helps in managing cash flows and cash reserves of firms, focusing on maintaining an optimal balance level.

Interest Rate

The percentage charged on a loan or paid on deposits over a specific period, reflecting the cost of borrowing or the gain on savings.

Target Cash Balance

The ideal amount of cash that a company aims to hold to meet operational and transaction needs while minimizing holding costs.

Miller-Orr Model

A model used in financial management to determine the optimal level for cash balances under uncertainty.