A Company Produces Two Joint Products (Called 101 and 202)

question 168

Essay

A company produces two joint products (called 101 and 202) in a single operation that uses one raw material called Casko. Four hundred gallons of Casko were purchased at a cost of $800 and were used to produce 150 gallons of Product 101, selling for $5 per gallon, and 75 gallons of Product 202, selling for $15 per gallon. How much of the $800 cost should be allocated to each product, assuming that the company allocates cost based on sales revenue?

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Definitions:

Volatility Risk

The risk in the value of options portfolios due to unpredictable changes in the volatility of the underlying asset.

Hedge Ratio

A ratio used to measure the proportion of a position that is hedged or the amount of assets used to hedge a risk exposure.

Dynamic Hedging

Constant updating of hedge positions as market conditions change.

Delta Neutral

The value of the options portfolio is not affected by changes in the value of the underlying asset.