Question

The Wood Spirits Company produces two products long dash —methanol ​(wood alcohol) and turpentine —by a joint process. Joint costs amount to $121,000 per batch of output. Each batch totals   11,500 ​gallons: 25% methanol and​ 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are​ methanol, $2 per​ gallon, and​ turpentine,   $1 per gallon. Methanol sells for $ 20 per gallon. Turpentine sells for $15 per gallon.

1.	How much of the joint costs per batch will be allocated to methanol and to​ turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff​ point?
2.	If joint costs are allocated on an NRV​ basis, how much of the joint costs will be allocated to methanol and to​ turpentine?
3.	Prepare​ product-line income statements per batch for requirement 1 and 2. Assume no beginning or ending inventories.
4.	The company has discovered an additional process by which the methanol​ (wood alcohol) can be made into a​ pleasant-tasting alcoholic beverage. The selling price of this beverage would be $65 a gallon. Additional processing would increase separable costs $ 8 per gallon​ (in addition to the $ 2 per gallon separable cost required to yield​ methanol). The company would have to pay excise taxes of​ 20% on the selling price of the beverage. Assuming no other changes in​ cost, what is the joint cost applicable to the wood alcohol​ (using the NRV​ method)? Should the company produce the alcoholic​ beverage? Show your computations. Requirement 1. How much of the joint costs per batch will be allocated to methanol and to​ turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff​ point? ​(Round the weights to five decimal​ places.) Methanol Turpentine Total Physical measure of total production Weighting Joint costs allocated

Answer 1

Solution 1:

Allocation of Joint Cost - Physical measure method
Particulars	Methanol	Turpentine	Total
Output at split off point	2875	8625	11500
Weight	0.25	0.75
Allocation of Joint Cost (25:75)	$30,250.00	$90,750.00	$121,000.00

Solution 2:

Allocation of Joint Cost- NRV Method
Particulars	Methanol	Turpentine	Total
Sale Value after further processing	$57,500.00	$129,375.00	$186,875
Further Processing Cost	$5,750	$8,625	$14,375
Net Realisable Value	$51,750	$120,750	$172,500
Weight	0.30000	0.70000
Allocation of Joint Cost	$36,300	$84,700	$121,000

Solution 3:

Product Line Income Statement - Physical Measure Method
Particulars	Methanol	Turpentine	Total
Sales (A)	$57,500.00	$129,375.00	$186,875.00
Joint Cost (B)	$30,250.00	$90,750.00	$121,000.00
Further Processing Cost ( C )	$5,750.00	$8,625.00	$14,375.00
Gross Margin (D) (A-B-C)	$21,500.00	$30,000.00	$51,500.00

Product Line Income Statement - NRV Method
Particulars	Methanol	Turpentine	Total
Sales (A)	$57,500.00	$129,375.00	$186,875.00
Joint Cost (B)	$36,300.00	$84,700.00	$121,000.00
Further Processing Cost ( C )	$5,750.00	$8,625.00	$14,375.00
Gross Margin (D) (A-B-C)	$15,450.00	$36,050.00	$51,500.00

Solution 4:

Allocation of Joint Cost- NRV Method
Particulars	Wood Alcohal	Turpentine	Total
Sale Value after further processing	$186,875.00	$129,375.00	$316,250
Excise taxes	$37,375.00	$0.00	$37,375
Further Processing Cost	$28,750	$8,625	$37,375
Net Realisable Value	$120,750	$120,750	$241,500
Weight	0.50000	0.50000
Allocation of Joint Cost	$60,500	$60,500	$121,000

Product Line Income Statement - NRV Method
Particulars	Wood Alchocal	Turpentine	Total
Sales (A)	$186,875.00	$129,375.00	$316,250.00
Excise cost	$37,375.00	$0.00	$37,375.00
Joint Cost (B)	$60,500.00	$60,500.00	$121,000.00
Further Processing Cost ( C )	$28,750.00	$8,625.00	$37,375.00
Gross Margin (D) (A-B-C)	$60,250.00	$60,250.00	$120,500.00

As net income in increase therefore company should produce alcoholic beverages.