Question

Fancy Foods produces two types of microwavable products: beef-flavored ramen and shrimp- flavored ramen. The two products share com.non inputs such as noodle and spices. The production of ramen results in a waste product referred to as stock, which Fancy dumps at negligible costs in a local drainage area. Due to the popularity of its microwavable products, Fancy decides to add a new line of products that targets dieters. These new products are produced by adding a special ingredient to dilute the original ramen and are to be sold under the names Special B and Special S, respectively. In December 2018, all the Beef Ramen and Shrimp Ramen are now further processed into Special B and Special S. Following are the summary data for all the products in December 2018: Special B Special S Beef Ramen Shrimp Ramen $400,000 $100,000 25,000 $238,000 34,000 28,000 Joint Costs Separable further processing costs Production (tons) Transfer for further processing (ton) Sales (tons) Selling price per ton 20,000 20,000 28,000 $5 | $20 25,000 $17 | 34,000 | $33 Required: 1. Calculate Fancy's gross-margin percentage for Special B and Special S when joint costs are allocated using the following methods: a. Sales value at split-off point (3 points) b. Physical measure method (3 points) c. Net realizable value method (3 points) 2. Recently, Fancy discovered that the stock it is dumping can be sold to cattle ranchers at $4 per ton. In a typical month with the production levels shown, 6,000 tons of stock are produced and can be sold by incurring marketing costs of $12,400. Sandra Dashel, a management accountant, points out that treating the stock as a joint product and using the sales value at split-off method, the stock product would lose about $2,435 each month, so it should not be sold. a. How did Dashel arrive at that final number? (3 points) b. What do you think of her analysis, and should Fancy sell the stock? (3 points)

Answer 1

Ans.

a) Sales value at split off method

Allocation of Joint Costs Using Sales Value at Splitoff Method	Special B	Special S	Total
Sales value of total production at split off point	100,000.00	560,000.00	660,000.00
	[20,000 * 5]	[28,000 * 20]
Percentage (weight)[100,000 / 660,000 ; 560,000 / 660,000]	0.15	0.85	1
Joint costs allocated (400,000 *0.15 ; 400,000 * 0.85)	60,000.00	340,000.00	400,000.00

Income Statement Using Sales Value at Splitoff Method	Special B	Special S	Total
Revenue (a)	425,000.00	1,122,000.00	1,547,000.00
	[25,000*17]	[34,000 * 33]
Cost of Goods Sold:
Joint costs allocated (b)	60,000.00	340,000.00	400,000.00
Separable costs (c)	100,000.00	238,000.00	338,000.00
Cost of Goods Sold d = (b +c)	160,000.00	578,000.00	738,000.00
Gross Margin e = a-d	265,000.00	544,000.00	809,000.00
Gross Margin %	62%	48%	52%

b) Physical-Measure Method

Allocation of Joint Costs Using Physical-Measure Method	Special B	Special S	Total
Physical measure of total production	20,000.00	28,000.00	48,000.00
Percentage (weight)[20,000 / 48,000 ; 28,000 / 48,000]	42%	58%	100%
Joint costs allocated (400,000 *0.42 ; 400,000 * 0.58)	168,000.00	232,000.00	400,000.00

Income Statement Using Physical-Measure Method	Special B	Special S	Total
Revenue (a)	425,000.00	1,122,000.00	1,547,000.00
	[25,000*17]	[34,000 * 33]
Cost of Goods Sold:
Joint costs allocated (b)	168,000.00	232,000.00	400,000.00
Separable costs (c)	100,000.00	238,000.00	338,000.00
Cost of Goods Sold d = (b +c)	268,000.00	470,000.00	738,000.00
Gross Margin e = a-d	157,000.00	652,000.00	809,000.00
Gross Margin %	37%	58%	52%

c) NRV method

Allocation of Joint Costs Using NRV Method	Special B	Special S	Total
Final sales of production	425,000.00	1,122,000.00	1,547,000.00
	[25,000*17]	[34,000 * 33]
Less : Separable Cost	100,000.00	238,000.00	338,000.00
NRV at split off point	325,000.00	884,000.00	1,209,000.00
Percentage (weight)[325,000 / 1,209,000 ; 884,000 / 1,209,000]	27%	73%	100%
Joint costs allocated (400,000 *0.27 ; 400,000 * 0.73)	108,000.00	292,000.00	400,000.00

Income Statement Using NRV Method	Special B	Special S	Total
Revenue (a)	425,000.00	1,122,000.00	1,547,000.00
	[25,000*17]	[34,000 * 33]
Cost of Goods Sold:
Joint costs allocated (b)	108,000.00	292,000.00	400,000.00
Separable costs (c)	100,000.00	238,000.00	338,000.00
Cost of Goods Sold d = (b +c)	208,000.00	530,000.00	738,000.00
Gross Margin e = a-d	217,000.00	592,000.00	809,000.00
Gross Margin %	51%	53%	52%

2.

Allocation of Joint Costs Using Sales Value at Splitoff Method	Special B	Special S	Stock	Total
Sales value of total production at split off point	100,000.00	560,000.00	24,000	684,000
	[20,000 * 5]	[28,000 * 20]	[6,000 *4]
Percentage (weight)	14.62%	81.87%	3.51%	100%
Joint costs allocated	58,480.00	327,485.00	14,035.00	400,000.00

Income Statement Using Splitoff Method	Special B	Special S	Stock	Total
Revenue (a)	425,000.00	1,122,000.00	24,000.00	1,571,000.00
	[25,000*17]	[34,000 * 33]	[6,000 * 4]
Cost of Goods Sold:
Joint costs allocated (b)	58,480.00	327,485.00	14,035.00	400,000.00
Separable costs (c)	100,000.00	238,000.00	-	338,000.00
Cost of Goods Sold d = (b +c)	158,480.00	565,485.00	14,035.00	738,000.00
Gross Margin e = a-d	266,520.00	556,515.00	9,965.00	833,000.00
Less: Marketing cost (f)			12,400.00	12,400.00
Operating Income g = (e-f)			(2,435.00)	820,600.00

This analysis, $400,000 of joint costs are re-allocated between Special B, Special S, and the stock is flawed.

Joint costs are always irrelevant in a process-further decision. Only incremental costs and revenues past the splitoff point are relevant. In this case, then, the revenues, $24,000, and the incremental costs, $12,400, from selling the stock result in an increase in Fancy's operating income by $ 10,000 ($24,000 – $12,400). So Fancy should sell the stock.