Solved: Goodson Pharmaceutical Company manufactures

three main products

Goodson Pharmaceutical Company manufactures three main products from a joint process:
Altox, Lorex, and Hycol. Data regarding these products for the fiscal year ended May 31, 2010,
follow:

Altox is currently sold at the split-off point to a vitamin manufacturer. Lorex is processed further
after the split-off point and sold as a cold remedy. Hycol, an oil produced from the joint process,
is sold at the split-off point to a cosmetics manufacturer. Arlene Franklin, president of Goodson,
is reviewing opportunities to change the processing and sale of these three products. Altox can
be refined for use as a high blood pressure medication, but this would result in a loss of 20,000
units. The costs to further process Altox are estimated to be $250,000 annually. The medication
would sell for $5.50 per unit. The company has an offer from another pharmaceutical company
to purchase Lorex at the split-off point for $2.25 per unit. Goodson's research department has
suggested that the company process Hycol further and sell it as an ointment to relieve muscle
pain. The additional processing would cost $75,000 annually and would increase the units of
product by 25 percent. The product would be sold for $1.80 per unit. The joint process that
Goodson currently uses also produces 50,000 units of Dorzine, a hazardous chemical waste
product that costs the company $0.35 per unit for proper disposal. Dietriech Mills Inc. is
interested in using the Dorzine as a solvent; however, Goodson must refine the Dorzine at an
annual cost of $43,000. Dietriech would purchase all Dorzine Goodson can refine and is willing
to pay $0.75 for each unit.

Required
1. Which of the three main products should Goodson Pharmaceutical Company sell at the split-
off point? Which of the products should the company process further to maximize profits?
Support your answers with appropriate calculations, using a spreadsheet system.
2. Assume that Goodson has decided to refine the waste product Dorzine as a by-product of the
joint process in the future and to sell it to Dietriech Mill.
a. Did Goodson make the correct decision regarding Dorzine? Support your answer with
appropriate calculations.
b. Explain whether the decision to treat Dorzine as a by-product will affect your answer to
requirement 1.
(CMAAdapted)

ANSWER
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