Question

P 8-28: Columbine Granite Columbine Granite produces a number of different granite products from its granite quarry in Geor- gia. The production process begins when a 50-foot-tall block of solid granite is excavated from the mountain quarry. These huge blocks of granite are drilled and broken into movable smaller blocks for processing into building materials. The smaller blocks are cut into granite slabs of desired thickness and the granite slabs are then polished using abrasives and diamond polishing wheels to enhance the beauty of the granite. The slabs are then sorted by size. Some slabs will be cut to smaller dimensions due to natural imperfections in the stone. The larger pieces that cannot be used in slabs are broken up for decorative stone. Sand and stone dust result from cutting the 50-foot blocks out of the mountain, cutting these into smaller blocks, cutting these smaller blocks into slabs, and from producing the decorative stones. A 50-foot-tall block of granite produces the following finished products: Tons/Batch Cubic Feet/Batch (volume) Sand and stone dust Decorative stone Small 2" slabs (4' x 8') Large 2" slabs (4' x 12) 330.0 577.5 412.5 330.0 7.500 5,000 8.750 3,750 The cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and then the cost of cutting the slabs is $183,000. A 50-foot block produces, on average, 937.5 4'x 8' slabs and the cost of polishing one 4" x 8° slab is $96. A 50-foot block produces, on average, 500 4'x 12 slabs and the cost of polishing one 4x 12' slab is $144. The cost of finishing and packaging the 330 tons of sand and stone dust is $500, and the cost of further grinding and packaging the 577.5 tons of decorative stones is $2,500 Once each of the four products is finished (i.e., the sand and stone dust is finished and packaged and the slabs are polished), they are sold for the following amounts: Price/Ton Price/Slab Sand and stone dust Decorative stone Small 2" slabs (under 4' × 8') Large 2" slabs (4' x 12) $25.00 $75.00 S320.00 $480.00 Cost Allocation: Practices 383 Required: Allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products using tons of each product produced from the 50-foot block as the allocation base. a. b. Calculate the total profits of producing each of the four products and the total profit of pro- cessing a 50-foot block after allocating the $183,000 cost to the four products using tons of each product produced from part (a). Allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products using the cubic feet (volume) of each product produced from the 50' X 20"X 20' block as the allocation base. c. d. Calculate the total profits of producing cach of the four products and the total profit of processing a 50-foot block from the mountain after allocating the $183,000 cost to the four products using cubic feet (volume) of each product produced from part (c e. Which of the four products (i.e., sand and stone dust, decorative stones, the 4 x 8 slabs and the 4 x 12' slabs) should Columbine sell and which ones should not be sold? Assume that the products Columbine decides not to sell can be used as fill material in the quarry There is no cost of hauling the unsold products back to the quarry, and any unsold products do not incur the additional processing costs (i.e, the sand and stone dust does not require any packaging, the decorative stones do not require further grinding and packaging, or the 4'x 8 and 4' x 12' slabs do not require any polishing). Justify your answer. f Should Columbine Granite use tons or cubic feet (volume) to allocate the $183,000 cost of removing the 50-foot block from the mountain, cutting it into smaller blocks, and cutting the smaller blocks into slabs to the four products? Justify your recommendation based on well-reasoned arguments

Answer 1

a. Allocation of cost of 183,000

Particulars	Small slabs	Large slabs	Sand and Stone dust	Decorative Stone
Tons produced	412.5	330	330	577.5
Cost allocated(183,000)	45,750	36,600	36,600	64,050

b.

Particulars	Small 2'' labs	Large 2'' slabs	Sand and stone dust	Decorative stone	Total
Price/unit	320	480	25	75
No of units	937.5	500	330	577.5
Total Sale	300,000	240,000	8,250	43,313	591,563
Total cost	-90,000	-72,000	-500	-2,500	-165,000
Profit	210,000	168,000	7,750	40,813	426,563
Cost allocation as per (a)	-45,750	-36,600	-36,600	-64,050	-183,000
Net profit	164,250	131,400	-28,850	-23,238	243,563

Total profit of processing the 50 foot block is 243,563

Note; Total cost is derived for slabs by multipying the per unit cost and the number of units. For sand and stone dust and decorative stone, the total cost is taken as given.

c. Allocation of cost using cubic feet as base:

Particulars	Small 2'' slabs	Large 2'' slabs	Sand and stone dust	Decorative stone
Cubic feet	8,750	3,750	7,500	5,000
Cost allocated(183,000)	64,050	27,450	54,900	36,600

d.

Particulars	Small 2'' slabs	Large 2'' slabs	Sand and stone dust	Decorative stone	Total
Price/unit	320	480	25	75
No of units	937.5	500	330	577.5
Total	300,000	240,000	8,250	43,313	591,563
Total cost	-90,000	-72,000	-500	-2,500	-165,000
Profit	210,000	168,000	7,750	40,813	426,563
Cost allocation as per (c)	-64,050	-27,450	-54,900	-36,600	-183,000
Net profit	145,950	140,550	-47,150	4,213	243,563

e. The decision regarding which products should be sold can be made using the above tables. It is pretty clear that both the types of slabs should be sold as they result in profits. Let us analyse the following scenarios and choose the best one:

Case 1- producing all 4 products- Total profit is 243,563

Case 2- producing all except sand and stone dust: Total revenue = 583,313 Total cost = 164,500 Total cost to be allocated = 183,000 Net profit= 583,313-164,500-183,000 = 235,813

Therefore, we can see that Columbine Granite's total profit is maximised when all the products are sold.

f. Columbine Granite should use cubic fee as the base to allocate the cost of 183,000. Though the total profit in both the cases (b) & (d) is the same, we can observe that in (b), 2 products out of 4 are incurring losses due to high cost allocation. However, when cubic feet is used as the base, 3 out 4 products have profits after allocation. Therefore, it is recommended to use cubic feet as the base for allocation.