75 9.2 Part 1: Questions, Exercises and Problems

Questions

1. What are joint products and joint costs?
2. Describe the two methods of allocating joint costs.

Exercises: Set A

1. Allocating Joint Costs. Clemson Products produces two joint products, product Y and Z. Prior to the split-off point, the company incurred $60,000 in joint costs. Clemson Products produced 10,000 yards of product Y and 30,000 yards of product Z produced. Product Y sells for $4 per yard and product Z sells for $2 per yard.
2. Required:
   1. Allocate joint costs to each product using the physical quantities method(yards), and calculate the profit or loss for each product.
   2. Allocate joint costs to each product using the relative sales value method, and calculate the profit or loss for each product.

Exercises

1. Allocating Joint Costs and Product Profitability . Fresh Catch, Inc., has a fleet of fishing boats. The most recent outing cost $90,000 and yielded 24,000 pounds of salmon and 8,000 pounds of halibut. Fresh Catch can sell salmon for $3 per pound and halibut for $6 per pound.

Required:

a. Allocate joint costs to each product using the physical quantities method, and calculate the profit or loss for each product.

b. Allocate joint costs to each product using the relative sales value method, and calculate the profit or loss for each product.

c. Explain what happened to the profitability of each product as the allocation method was changed from requirement a to requirement b. Why might management make bad decisions using the information from requirement a?

d. Assume salmon can be processed further into smoked salmon for an additional $2.50 per pound. Customers are willing to pay $7 per pound for smoked salmon. Should Fresh Catch process the salmon further? Explain.

          e. Allocate joint costs to each product using the constant gross margin method.

2. Allocating Joint Costs . Fruit Tree Nursery (FTN) grows peach and apple trees in containers for its customers. This past year, FTN grew 3,000 peach trees and 7,000 apple trees at a cost of $100,000. FTN can sell peach trees for $20 each and apple trees for $11 each.

Required:

a. Allocate joint costs to each product using the physical quantities method, and calculate the profit or loss for each product.

b. Allocate joint costs to each product using the relative sales value method, and calculate the profit or loss for each product.

c. Assume peach trees can be processed further by allowing them to grow for another few months. The additional processing cost is $4 per tree, and customers are willing to pay $23 for the larger trees. Should FTN process the peach trees further? Explain.

d) Assume peach trees have no market at split off. They are too fragile to survive at that stage. But they have a market if they are allowed to grow for a few months. The additional processing cost is $4 per tree, and customers are willing to pay $23 for the larger trees. Allocate joint costs using the Net Realizable Method. Calculate the profit or loss for each product.

e) Assume peach trees have no market at split off. They are too fragile to survive at that stage. But they have a market if they are allowed to grow for a few months. The additional processing cost is $4 per tree, and customers are willing to pay $23 for the larger trees. Allocate joint costs using the Constant Gross Margin method.

3. Allocating Joint Costs and Evaluating Overall Company Profit. Elexor, Inc., produces two joint products, product A and product B. Prior to the split-off point, the company incurred $10,000 in joint costs. Production of product A totaled 400 pounds, and product B totaled 600 pounds. Product A sells for $60 per pound and product B sells for $10 per pound.

Required:

1. Allocate joint costs to each product using the physical quantities method (pounds), and calculate the profit or loss for each product.
2. Allocate joint costs to each product using the relative sales value method, and calculate the profit or loss for each product.
3. Using your answer to requirement a, describe what will happen to overall company profit if the least profitable product is eliminated.