Question

Oregon Forests uses a joint process to manufacture two grades of wood: A and B. During October 2013, the company incurred $16,200,000 of joint production cost in producing 27,000,000 board feet of Grade A and 9,000,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet of lumber produced. The company can sell Grade A lumber at the split-off point for $0.70 per board foot. Alternatively, Grade A lumber can be further processed at a cost of $0.75 per board foot and then sold for $1.50 per board foot. No opportunity exists for processing Grade B lumber after split-off.

a. How much joint cost should be allocated to Grade A and to Grade B lumber?

b. If Grade A lumber is processed further and then sold, what is the incremental effect on Oregon Forest’ net income? Should the additional processing be performed?

Answer 1

Physical measure allocation:

It is given that the company had incurred $16,200,000 joint production cost in producing 27,000,000 board feet of Grade A and 9,000,000 board feet of Grade B. The company sells Grade A at the split-off point of $0.70 per board foot, process cost of $0.75 per board foot, and sells at $1.50 per board foot.

Note: There is no processing for Grade B.

Calculate the amount of joint cost allocated to Grade A and Grade B:

a)

Calculate the allocation rate:

The joint cost allocated to Grade A:

The joint cost allocated to Grade B:

Hence, the joint cost allocated to Grade A is $12,150,000 and to Grade B is $4,050,000.

b)

Calculate the incremental cost if Grade A is processed:

Where, $1.50 is the sold out value, $0.70 is the split-off point, and $0.75 is the processing cost.

Calculate the rate of income as follows:

Calculate the increase in the income:

The incremental net income is . Hence, the company can further process Grade A.