Problem 4-24B Allocating joint product cost Mountain Tea Co. makes two products: a high-grade tea branded...
Problem 4-24B Allocating joint product cost
Mountain Tea Co. makes two products: a high-grade tea branded Wulong and a low-grade tea branded San Tea for the Asian market. Mountain purchases tea leaves from tea firms in mountainous villages of Taiwan and processes the tea leaves into a high-quality product. The tea leaves are dried and baked in the manufacturing process. Mountain pays farmers $600 for 900 kilograms of tea leaves. For 900 kilograms of green leaves, the company can produce 100 kilograms of Wulong and 200 kilograms of tea fragments including dried leave stems and broken dried leaves. The cost of this process is $300 per batch. The tea fragments are packaged into San Tea. The market price for San Tea is $2 per kilogram. The market price is $20 per kilogram for Wulong. Mountain has an option of taking an additional process to refine the 100 kilograms of Wulong into 30 kilograms of Donding, a prestigious brand. The market price of Donding is $100 per kilogram. The cost of the additional process is $250 per batch.
Required
Allocate the joint cost to the joint products, Wulong and San Tea, using weight as the allocation base. Calculate the gross profit for each product. Since the San Tea is sold at a loss, should that product line be eliminated?
Allocate the joint cost to the joint products, Wulong and San Tea, using relative market value as the allocation base. Calculate the gross profit for each product. Compare the total gross profit (Wulong + San Tea) computed in Requirement b with that computed in Requirement a above. Explain why the total amount is the same. Comment on which allocation base (weight or relative market value) is more appropriate.
Should Mountain Tea further process Wulong into Donding?
Homework Answers
It is assumed that batch size
is 900 kg for initial process
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Problem 4-24B Allocating joint
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