Question

The Dairy Company produces three products from a joint processes using whole milk: butter, cheese, and cream. The joint costs amount to $24,000 per batch of output. Each batch totals 50,000 liters : 25% butter, 25%cheese, 50% cream . All products are processed further without gain or loss in volume. Separable costs are butter, $0.5 per liter, cheese , $2 per liter, cream ,$0.25 per liter . The selling prices per liter are respectively; $3.50, $6, $4.

Required

a) How much joint cost per batch should be allocated to cream, assuming that joint costs are allocated on a physical measure basis?

b) if joint costs are assigned on a net realizable value basis, how much joint cost should be allocated to cheese?

c) An organic grocer has offered to buy all of the cheese produced at $5.50 per liter. Traditionally 90% of the cheese production is sold. How much better or worse off financially is the company from accepting this offers?

Answer 1

Answer is given below

a) Joint cost allocated based on Physical measures Butter Units- Litres 12,500 Units- Litres 25.00% Joint Cost allocated $6,000 Cheese 12,500 25.00% $6,000 Cream 25,000 50.00% $12,000 Total 50,000 100.00% $24,000 b) Allocation based on Net Realisable Value Total 25,000 Units-Litres Final Selling price per gallon Further processing cost Final Sales Value Less: Further processing costs Net Realisable value NRV % Joint cost allocated based on NRV Butter 12,500 $3.50 $0.50 $43,750 $6,250 $37,500 20.69% $4,966 Cheese 12,500 $6.00 $2.00 $75,000 $25,000 $50,000 27.59% $6,621 Cream 25,000 $4.00 $0.25 $100,000 $6,250 $93,750 51.72% $12,414 $218,750 $37,500 $181,250 100.00% $24,000 Evaluation of Further processing or Sale at Split-off point Final selling price Sale price offered Incremental sales Further separate processing cost Incremental profit (Loss) per unit $6.00 $5.50 $0.50 $2.00 Total $75,000 $68,750 $6,250 $25,000 $18,750 Conclusion Three is incremental net loss if cheese is further processed Hence the cheese should be sold at split off point without further processing The company will benefit $16,875 ( 90% of $18,750)

Evaluation is done for total production of 12.500 litres