Question

Stuart Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 17,000 pounds of raw chicken that costs $9,250, the company produces two parts: 3,400 pounds of drumsticks and 5,700 pounds of breast for a processing cost of $6,502. The chicken breast is further processed into 4,900 pounds of steak for a processing cost of $2,900. The market price of drumsticks per pound is $1.60 and the market price per pound of chicken steak is $4.90. If Stuart decided to sell chicken breast instead of chicken steak, the price per pound would be $2.50.

Required

a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.

a-2. Calculate the gross margin for each product.

a-3. If the drumsticks are producing a loss, should that product line be eliminated?

b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.

b-2. Calculate the gross margin for each product.

c-1. Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).

c-2. How would the profit be affected by your answer in c-1?

Answer 1

a)

total cost of the joint product

=Cost of raw cheken + processing cost

=9250+6502

=15752

Allocation of the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.

Now we will find allocation rate as under

=Total cost /cost driver

=15752/(3400+5700)

=15752/9100

=1.731

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a-2.

Calculation of the gross margin for each product.

Joint product	Allocation rate	Weight pount	Total
Drum stick	1.731	3400	5885
Breast	1.731	5700	9867
Total			15752

Now we will find gross margin for each product.as under

	Drum stick	Breast	Total
Sales quantity	3400	5700	9100
Selling price	1.6	2.5
Sales Revenue	5440	14250	19690
Less: cost	5885	9867	15752.1
Net income	-445.4	4383.3	3937.9

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a-3

If the drumsticks are producing a loss, should that product line be eliminated?

Yes, drumsticks are producing a lossthe company should eliminate such productline

___________________________________

b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base

Now we woill take the markate value as the allocation base

Allocation of the joint cost to the joint products, drumsticks and breasts, using ,markate value as the allocation base.

Now we will find allocation rate as under

=Total cost /cost driver

=15752/33,370

=0.472

Joint product	Allocation rate	Weight pount	Total
Drum stick	0.472	5440	2568
Breast	0.472	27930	13184
Total			15752

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b-2. Calculate the gross margin for each product.

	Drum stick	Breast	Total
Sales quantity	3400	5700	9100
Selling price	1.6	2.5
Sales Revenue	5440	14250	19690
Less: cost	4352	11400	15752.1
Net income	1087.972372	2849.928	3937.9

_____________________________

C-1

Should Martin further process chicken breasts into chicken steak?

Cost of breast	13184
Cost of further processing	2900
Total cost	16084

Statement of income after further processing

	Breast
Sales quantity	4900
Selling price	4.9
Sales Revenue	24010
Less: cost	14300
Net income	9710

the profit be affected by your answer in c-1

=

Net income afer further processing	9710
Net income afer further processing	2850
Diffrance	6860