Question

Gribskov Sawmill processes trees from the close forest district and produce various wood products such as lumber and boards. All products can be sold 'as they are' or they can be processed further to different types of finished products such as windows, doors and stairs. The firm considers this process as a split-off-process. The five products are listed in table 1 given the production of one batch of trees: Product Intermediate sales | Finished sales price per ton price per ton А в C Number of tons wood used per batch 1.2 т 3 4.5 5 6.3 850 650 600 710 400 1.000 850 695 825 400 The net cash outflow to process one batch of tree into the five separate wood products is 9,000 DKK per batch and the net cash outflow to convert each intermediate product into a finished product is 125 DKK per ton. Required 1. If Gribskov Sawmill's cost to process trees into the five wood products is 9,000 DKK, which of the five products should Gribskov Sawmill process after the split off point? 2. Assuming that the quantities and prices in the table do not change, how much can the 9,000 DKK cost to process one batch rise before Gribskov Sawmill should stop processing trees into the five wood products? 3. Assuming that the cost to process trees into the five wood products is 9,000 DKK, and given your decision in question 1, calculate the profit per ton of each of the five wood products after allocating the 9,000 DKK processing cost to the five wood products using: a. Tons of wood products produced b. Net Realizable Value (NRV) of the wood products produced 4. Given the allocation of the 9,000 DKK cost of processing trees in question 3, do you want to change any of your decisions in question 1, assuming your objective is to maximize the net cash flow for Gribskov Sawmill?

Answer 1

Answer-1:

Whethet to Production Intermediate Value at sales price Further Finished Market process Product qty Net profit processing sales price split-off Incremental after split-off % of sales value Joint cost Gross (in tons) point cost per ton per ton allocation value profit profit point (DKK) (DKK) (DKK) (DKK) (DKK) (DKK) (DKK) (DKK) (DKK) 238 1,000 1.2 850 1,020 8.69 782 150 1,200 268 30 Yes 850 B 650 1,950 16.61 1,495 455 375 2,550 680 225 Yes 695 (135) 4.5 600 2,700 23.00 2,070 630 563 3,128 495 No (50) 710 3,550 30.24 2,721 829 625 825 4,125 779 No (199) (788) 6.3 400 2,520 21.47 1,932 588 788 400 2,520 No 11,740 100.00 9,000

Note: Joint cost has been allocated on the basis of sale value at split-off point.

Answer-3(a):

Value at Production Further Market Product qty Joint cost split-off allocation point % of the Net profit Gross processing value (in tons) total profit (DKK) cost (DKK) (DKK) (DKK) (DKK) (DKK) 480 A 1.2 6.00 540 1,020 150 1,200 510 1350 600 B 3 15.00 1,950 375 2,550 825 2025 675 563 4.5 22.50 2,700 3,128 541 5 25.00 2250 3,550 1,300 625 4,125 1,250 (315) (1,103) 6.3 31.50 2835 2,520 788 2,520 20 9000

Answer-3(b):

Production Value at Further % of the Joint cost Gross processing Net profit cost Product split-off NRV qty total allocation profit (in tons) point (DKK) (DKK) (DKK) (DKK) (DKK) (DKK) 1.2 8.87 799 1,200 1,020 221 150 251 3 2,550 18.86 1697 1,950 253 375 478 4.5 2,700 618 484 3,128 23.13 2082 563 2745 3,550 625 4,125 30.50 805 755 843 6.3 2,520 18.63 1677 2,520 788 55 13,523 9000 ш