Question

Benson Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 14,000 pounds of raw chicken that costs $7,450, the company produces two parts: 2,500 pounds of drumsticks and 4,500 pounds of breast for a processing cost of $2,466. The chicken breast is further processed into 3,700 pounds of steak for a processing cost of $1,700. The market price of drumsticks per pound is $1.40 and the market price per pound of chicken steak is $3.70. If Benson decided to sell chicken breast instead of chicken steak, the price per pound would be $2.20. Required a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base. a-2. Calculate the gross profit for each product. a-3. If the drumsticks are producing a loss, should that product line be eliminated? b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base. b-2. Calculate the gross profit for each product. C-1. Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1). c-2. How would the profit be affected by your answer in c-?

Answer 1

A BC DE 1 al) 2 Product Allocation Rate Weight of Base (Allocated Cost 3 Drumsticks 1.417 2500 3541 4 Chicken Breast 1.417 4500 6375 5 Total Allocated Cost 9916 6 Allocation rate=Allocation cost /Activity 1.417 8 a2) Chicken 9 Drumstick Chicken Breast 10 Revenue 3500 9900 11 Cost of Goods sold 3541 6375 12 Gross Margin -41 3525 13 14 a3) 15 No 16 since in case of joint product we take decision as a whole. 17 i.e net result is profit of (3525-41) 3484 18 19 b1) 20 Relative market value method 21 Total cost of drumstick 2590 22 Total cost of Chicken breast 7326 23 Total cost 9916 24 25.

A B 1 al) 2 Product Allocation Rate 3 Drumsticks =C6 4 Chicken Breast 5 Total Allocated Cost 6 Allocation rate=Allocation cost /Activity Weight of Base 2500 4500 Allocated Cost =B3*C3 =B4%C4 =D3+D4 =C6 =(7450+2466)/(2500+4500) 8 a2) 9 Chicken Breast =2.2*4500 =D4 =C10-C11 Chicken Drumstick 10 Revenue =1.4*2500 11 Cost of Goods sold =D3 12 Gross Margin =B10-B11 13 14 a3) 15 No 16 since in case of joint product we take decision as a whole. 17 i.e net result is profit of (3525-41) =3525-41 18 19 61) 20 Relative market value method 21 Total cost of drumstick 22 Total cost of Chicken breast 23 Total cost 24 =(D5/(B10+C10*B10 =(D5/(B10+C10*C10 =B21+B22