Question

Imperial Mining is a coal company that produces three grades of coal-High, Medium, and Low-in fixed proportions. The joint costs of mining total $1,770,000. In a typical month, the company will mine 20,480 tons of High-Grade, 30,720 tons of Medium-Grade, and 10,240 tons of Low-Grade coal. Market prices have been relatively stable at $60 per ton for High-Grade, $40 per ton for Medium- Grade, and $10 per ton for Low-Grade. There are no costs to refine the individual grades of coal once it is mined.

Answer 1

Answer:

Req A
We have to allocate the joint cost on the basis of physical quantities
					Statement for allocation of joint cost
Product	physical quantity	Joint cost =(respective qty / total qty)* joint cost
High-Grade	20,480	5,90,000
Medium-Grade	30,720	8,85,000
Low-Grade	10,240	2,95,000
Total	61,440	17,70,000
Quantity	High-Grade	Medium-Grade	Low-Grade	Total
Quantity	20,480	30,720	10,240	61,440
Price/ per ton	60	40	10
Revenue (NRV)	12,28,800	12,28,800	1,02,400	25,60,000
Allocated joint cost	5,90,000	8,85,000	2,95,000	17,70,000
Product profit /loss	6,38,800	3,43,800	-1,92,600	7,90,000
Req B
We have to allocate the joint cost on the basis of NRV
Statement for allocation of joint cost
Product	NRV	Joint cost =(respective NRC / total NRV)* joint cost
High-Grade	12,28,800	8,49,600
Medium-Grade	12,28,800	8,49,600
Low-Grade	1,02,400	70,800
Total	25,60,000	17,70,000
Quantity	High-Grade	Medium-Grade	Low-Grade	Total
Quantity	20,480	30,720	10,240	61,440
Price/ per ton	60	40	10
Revenue (NRV)	12,28,800	12,28,800	1,02,400	25,60,000
Allocated joint cost	8,49,600	8,49,600	70,800	17,70,000
Product profit /loss	3,79,200	3,79,200	31,600	7,90,000