SPECIAL ORDER, FUNCTIONAL-BASED ANALYSIS
Lancaster Company manufactures two types of hair conditioners, Creemy and Shiney, out of a joint process. The joint (common) costs incurred are $840,000 for a standard production run that generates 360,000 gallons of Creemy and 240,000 gallons of Shiney. Additional processing costs beyond the split-off point are $2.80 per gallon for Creemy and $1.80 per gallon for Shiney. Creemy sells for $4.80 per gallon, while Shineysells for $7.80 per gallon.
Comida Buena, a supermarket chain, has asked Lancaster to supply it with 480,000 gallons of Shiney at a price of $7.30 per gallon. Comida Buena plans to have the conditioner bottled in 16-ounce bottles with its own Comida Buena label.
If Lancaster accepts the order, it will save $0.10 per gallon in packaging of Shiney. There is sufficient excess capacity for the order. However, the market for Creemy is saturated, and any additional sales of Creemy would take place at a price of $3.20 per gallon. Assume that no significant non-unit-level activity costs are incurred.
1. What is the profit normally earned on one production run of Creemy and Shiney?
2. Should Lancaster accept the special order? Explain.