Question

Martin 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 12,000 pounds of raw chicken that costs $7,000, the company produces two parts: 2,800 pounds of drumsticks and 4,200 pounds of breast for a processing cost of $2,450. The chicken breast is further processed into 3,200 pounds of steak for a processing cost of $2,000. The market price of drumsticks per pound is $1.25 and the market price per pound of chicken steak is $4.20. If Martin decided to sell chicken breast instead of chicken steak, the price per pound would be $2.20.

a1: Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base. (Round "Allocation Rate" to 2 decimal places and other answers to the nearest dollar amount.)

a2: Calculate the gross margin for each product.

a3: If the drumsticks are producing a loss, should that product line be eliminated? d. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base. (Round your intermediate calculations and final answers to 2 decimal places.)

b1: Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.

b2: Calculate the gross margin for each product.

c1: Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).

c2: How would the profit be affected by your answer c-1.

Answer 1

ANSWER

a-1.
Product	Allocation rate	x	Weight of base	=	Allocated cost
Drumsticks	1.35	x	2800	=	3780
Chicken breast	1.35	x	4200	=	5670

a-2.
	Chicken drumsticks	Chicken breast
Revenue	3500 [ 2800*1.25 ]	9240 [ 4200*2.20 ]
Cost of goods sold	3780	5670
Gross margin	-280	3570

a-3.

No, Chicken drumsticks should not be eliminated as Martin is earning overall profit of $3,290.

b-1. The net market value is calculated below: Description Drumsticks (2.800 x $1.25) Chicken breast (4,200 x $2.20) Total market value Market value $3,500 $9,240 $12.740 The total cost to be allocated is $9,450 ($7,000 + $2,450). The allocation rate is calculated below: Allocation rate = Cost to be allocated Total market value $9,450 $12,740 $0.74176 per sal es dollar = The total cost of drumsticks and chicken breasts is calculated below: | Total cost of Drumsticks (3,500 x $0.74176) Total cost of Chicken breast 9,240 x $0.74176) $2,596.16 $6,853.86 b-2 The gross margin for each product is calculated below: Revenue Chicken Drumsticks $3,500 (2.800 x $1.25) ($2,596.16) $903.84 Chicken Breast $9,240 (4.200 x $2.20) (S6,853.86) $2,386.14 Less: Cost of goods sold Gross margin

c-1.

Yes, Martin should further process chicken breast into chicken steak.

c-2.

Sales revenue if chicken breasts is processed further (3,200*$4.2)	$13,440
Sales revenue if chicken breast is not processed further	9,240
Incremental sales revenue	4,200
Additional processing cost	2,000
Incremental profit	$2,200

Effect on profit is  Profit increases by $2,200

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