Question

Breakfasttime Cereal Company manufactures two breakfast cereals in a joint process. Cost and quantity information is as follows:

Joint Cost			Cereal	Quantity at Split-Off Point			Sales Price per Kilogram
$	95,000		Yummies		12,500	kilograms	$	6.50
			Crummies		8,500	kilograms		8.00

Breakfasttime Cereal Company has an opportunity to process its Crummies further into a mulch for ornamental shrubs. The additional processing operation costs $2.00 per kilogram, and the mulch will sell for $13.00 per kilogram.

Required:

1-a.	Compute the net incremental revenue per kilogram if management decide to process Crummies into the mulch. (Round your answer to 2 decimal places.)

1-b.	Should Breakfasttime’s management decide to process Crummies into the mulch?
	Yes No

2.	Suppose the company does process Crummies into the mulch. Use the net-realizable-value method to allocate the joint production cost between the mulch and the Yummies.

Yummies

Mulch

Answer 1

1a. Compute the net incremental revenue per kilogram if management decide to process Crummies into the mulch. (Round your answer to 2 decimal places.)

Total Sales for Crummies = 8500 kgs X $8=$68000.

if management decide to process Crummies into the mulch

then Sales = 8500 kgs X $13 =$110500.

Net incremental revenue = new sales - old sales = $110500-$68000=$42000.

I,e, Net incremental revenue per unit = $42000/8500=4.94 per unit.

1b.Should Breakfasttime’s management decide to process Crummies into the mulch?

Yes as here cost per unit is creasing $2 weather Sales price per unit is increasing $5 (=$13-$8 ). Here $3 per unit extra profit can be earn if management decide to process Crummies into the mulch.

2.Suppose the company does process Crummies into the mulch. Use the net-realizable-value method to allocate the joint production cost between the mulch and the Yummies.

Here Firstly we have calculate the Net realizations value of both product.

Formula for Net Realization value (NRV) is = Sales Value - Separable costs (additional cost)

Now for NRV for Crummies into the mulch is = $110500 (8500X$13)- $17000(8500X$2)=$93500.

NRV for Yummies = 81250 (12500X$6.5)-0 (there is no additional cost for yummies)=$81250

Allocation of Joint cost under net realization value method

Total Joint Cost is $95000 Total NRV = $93500+$81250 =$174750

Percent of NRV total

Yummies =$81250/$174750=46.49%

Crummies into the mulch =$93500/$174750=53.51%

Allocations of Join cost

Yummies = $95000 X46.49%=$44165.50

Crummies into the mulch =$95000X 53.51%=$50834.50