Question

Please write in MIC Word

1. AlMarai processes raw milk into various products. 1,000 Liters of raw milk can be converted for SR 20,000 into 1,000 bottles of 0.5 Liter of Laban and 1,000 bottles of 0.5 Liters of processed milk. A bottle of 0.5 Liter of Laban can be sold at split-off for SR 5 and a bottle of 0.5 Liters of processed milk can be sold for SR 10. AlMarai can process the 1,000 bottles of processed milk into 600 cans of fresh cream at an additional cost of SR 3,000. Each can of fresh cream can be sold for SR15. The 1,000 bottles of Laban can be processed at a cost of SR2,000 and made into 400 cans of Labne. A can of Labne can be sold for SR 12.

	Laban	Processed Milk	Labne	Fresh Cream
Joint Cost	SR 20,000
Separable Costs			SR2,000	SR3,000
Production	1,000	1,000	400	600
Selling Price	SR 5	SR 10	SR18	SR 21

Allocate the joint cost of SR 20,000:

1. Between Laban and Processed Milk using Sales value at split-off method (1pt)
2. Between Laban and Processed Milk using the physical-measure method(1pt)
3. Between Labne and Fresh Cream using NRV method (1pt)
4. Should AlMarai have processed each of the products further? (2pts)

Answer 1

	Using Sales value at split-off method:
				Laban	Processed Milk	Total
	Bottles produced		a	1000	1000
	Sales price per bottle		b	5	10
	Sales value		a*b	5000	10000	15000
	Allocation %			33%	67%
				(5000/15000)	(10000/15000)
	Joint cost allocation			6600	13400	20000
				(20000*33%)	(20000*67%)
	Using the physical-measure method
				Laban	Processed Milk	Total
	Bottles produced		a	1000	1000	2000
	Allocation %			50%	50%
				(1000/2000)	(1000/2000)
	Joint cost allocation			10000	10000	20000
				(20000*50%)	(20000*50%)
	Using NRV method:
				Labne	Fresh cream	Total
	Cans produced		a	400	600
	Sales price per can		b	12	15
	Sales value		a*b	4800	9000
	Less: Additional cost			2000	3000
	Net realizable value			2800	6000	8800
	Allocation %			32%	68%
				(2800/8800)	(6000/8800)
	Joint cost allocation			6400	13600	20000
				(20000*32%)	(20000*68%)
	Whether to process further or not?
	Incremental profit/(loss):
					Labne	Fresh cream
	Sales value after further processing				4800	9000
	Less: sales value at split-off point				5000	10000
	(Sales price of laban and processed milk)
	Incremental revenue/(loss)				-200	-1000
	Less:Additional cost				2000	3000
	Incremental profit/(loss)				-2200	-4000
	Processing further leads to incremental loss in both cases.
	Hence,The products should be sold at split-off point (No further processing)