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Sunshine Oil Company buys crude vegetable oil. Refining this oil results in four products at the splitoff point. A, B, C, and D. Product C is fully processed by the splitoff point. Products A, B, and D can individually be further refined into Super A, Super B, and Super D. In the most recent month (December), the output at the splitoff point was as follows:
Product A,
322 comma 400
| gallons |
| times |
Product B,
119 comma 600
| gallons |
| times |
Product C,
52 comma 000
| gallons |
| times |
Product D,
26 comma 000
| gallons |
The joint costs of purchasing and processing the crude vegetable oil were
$ 96 comma 000
.
Sunshine
had no beginning or ending inventories. Sales of product C in December were
$ 24 comma 000
.
Products A, B, and D were further refined and then sold. Data related to December are as follows:
| Separable Processing Costs | ||
| to Make Super Products | Revenues | |
| Super A | $249,600 | $320,000 |
| Super B | 102,400 | 160,000 |
| Super D | 152,000 | 160,000 |
Sunshine
had the option of selling products A, B, and D at the splitoff point. This alternative would have yielded the following revenues for the December production:
| times |
Product A, $ 84 comma 000
| times |
Product B, $ 72 comma 000
| times |
Product D, $ 60 comma 000
Requirements
Compute the gross-margin percentage for each product sold in December, using the following methods for allocating the
$ 96 comma 000
| joint costs: | |||||||
|
|||||||
| 2. | CouldSunshine |
| have increased its December operating income by making different decisions about the further processing of products A, B, or D? Show the effect on operating income of any changes you recommend. |
Expert Answer
| Answer 1. | |||||
| Allocation of Joint Cost | |||||
| Under Sales Value at Split off | |||||
| Product | Sales Value at Split off | Joint Cost Allocated (Sales Value / Total Sales Value) X $96,000) | |||
| A | 84,000 | 33,600 | |||
| B | 72,000 | 28,800 | |||
| C | 24,000 | 9,600 | |||
| D | 60,000 | 24,000 | |||
| Total | 240,000 | 96,000 | |||
| Allocation of Joint Cost | |||||
| Under Physical Method | |||||
| Product | Physical Output in gallons | Joint Cost Allocated (Physical Output / Total Physical Output) X $96,000) | |||
| A | 322,400 | 59,520 | |||
| B | 119,600 | 22,080 | |||
| C | 52,000 | 9,600 | |||
| D | 26,000 | 4,800 | |||
| Total | 520,000 | 96,000 | |||
| Allocation of Joint Cost | |||||
| Under NRV Method | |||||
| Product | Sales Revenue After further processing | Sales Revenue at the point of split off | Further Processing Costs | Net Realizable Value | Joint Cost Allocated |
| Super A | 320,000 | – | 249,600 | 70,400 | 42,240 |
| Super B | 160,000 | – | 102,400 | 57,600 | 34,560 |
| C | – | 24,000 | – | 24,000 | 14,400 |
| Super D | 160,000 | – | 152,000 | 8,000 | 4,800 |
| Total | 640,000 | 24,000 | 504,000 | 160,000 | 96,000 |
| Answer 2. | |||
| Product | |||
| A | B | D | |
| Sales Revenue After further Processing | 320,000 | 160,000 | 160,000 |
| Sales Revenue At the point of split off | 84,000 | 72,000 | 60,000 |
| Incremental Sales revenue | 236,000 | 88,000 | 100,000 |
| Further Processing Costs | 249,600 | 102,400 | 152,000 |
| Profit (Loss) arising due to further processing | (13,600) | (14,400) | (52,000) |
| Sunshine should not further process any product as it will decrease the operating profit as shown above | |||
