Question

The Bean Company provides fresh coffee beans for restaurants, hotels, and other food service companies. Bean offers three types of coffee beans: Premium, Gourmet, and Quality. Each of the three coffees is produced in a joint process in which beans are cleaned and sorted. The sorting process is the split-off point in this joint process, and the output is the three types of beans. The beans can be sold at the split-off point or processed further, with different types of roasting and additional sorting. The additional processing requires additional, separable processing costs, as shown next. Separable processing requires no special facilities, and the production costs of further processing are entirely variable and traceable to the products involved. Last year all three products were processed beyond split-off. Joint production costs for the year were $195,000,000. Sales values and costs needed to evaluate Bean’s production policy follow:

	Premium			Gourmet			Quality			Total
Pounds produced		31,000,000			37,200,000			6,200,000			74,400,000
Separable processing cost	$	30,000,000		$	28,000,000		$	26,000,000		$	84,000,000
Pounds sold		31,000,000			37,200,000			6,200,000			74,400,000
Total joint cost										$	195,000,000
Sales price/pound (after additional processing)		$6			4			$1
Sales price at split-off		4			3			1

Required:
1. Determine last year’s unit cost and unit gross profit for each product assuming Bean allocates joint production costs using the physical measure method.
2. Determine unit cost and unit gross profit for each product if Bean allocates joint costs using the sales value at split-off method.
3. Which of The Bean’s products should be processed further?

Answer 1

Answer 1

	Premium	Gourmet	Quality
Cost per pound (Joint Cost / pounds)	$                 2.62	$                 2.62	$                 2.62
Gross Profit	$                 1.38	$                 0.38	$               (1.62)

Calculations:

	Premium	Gourmet	Quality
Physical Units	31,000,000	37,200,000	6,200,000
Joint Cost Allocated (195,000,000/84,000,000*Pounds)	81,250,000.00	97,500,000.00	16,250,000.00
Sales price at split-off	$                 4.00	$                 3.00	$                 1.00
Cost per pound (Joint Cost / pounds)	$                 2.62	$                 2.62	$                 2.62
Gross Profit	$                 1.38	$                 0.38	$               (1.62)

Answer 2

	Premium	Gourmet	Quality
Cost per pound (Joint Cost / pounds)	$                   3.23	$                 2.42	$              0.81
Gross Profit per unit	$                   0.77	$                 0.58	$              0.19

Calculations:

	Premium	Gourmet	Quality
Sales value at split off point	124,000,000	111,600,000	6,200,000
Joint Cost Allocated (195,000,000/241,800,000*sales value)	100,000,000.00	90,000,000.00	5,000,000.00
Sales price at split-off	$                   4.00	$                 3.00	$              1.00
Cost per pound (Joint Cost / pounds)	$                   3.23	$                 2.42	$              0.81
Gross Profit per unit	$                   0.77	$                 0.58	$              0.19

Answer 3

	Premium	Gourmet	Quality
Further process	Yes	Yes	No

Calculations:

	Premium	Gourmet	Quality
Final sales value	$ 186,000,000	$ 148,800,000	$     6,200,000
Less: Further processing Cost	$    30,000,000	$    28,000,000	$   26,000,000
Gross profit	$ 156,000,000	$ 120,800,000	$ (19,800,000)
Sales value at split off point	$ 124,000,000	$ 111,600,000	$     6,200,000
Further produced	Yes	Yes	No

In case of any doubt, please comment.