Question

The Bean Company provides fresh coffee beans for restaurants, hotels, and other food service companies. Bean offers three types of coffee beans: Premium, Gourmet, and Quality. Each of the three coffees is produced in a joint process in which beans are cleaned and sorted. The sorting process is the split-off point in this joint process, and the output is the three types of beans. The beans can be sold at the split-off point or processed further, with different types of roasting and additional sorting. The additional processing requires additional, separable processing costs, as shown next. Separable processing requires no special facilities, and the production costs of further processing are entirely variable and traceable to the products involved. Last year all three products were processed beyond split-off. Joint production costs for the year were $160,000,000. Sales values and costs needed to evaluate Bean’s production policy follow: Premium Gourmet Quality Total Pounds produced 24,000,000 38,800,000 4,800,000 67,600,000 Separable processing cost $ 23,000,000 $ 21,000,000 $ 19,000,000 $ 63,000,000 Pounds sold 24,000,000 38,800,000 4,800,000 67,600,000 Total joint cost $ 160,000,000 Sales price/pound (after additional processing) $5 3 $1 Sales price at split-off 3 2 1 Required: 1. Determine last year’s unit cost and unit gross profit for each product assuming Bean allocates joint production costs using the physical measure method. 2. Determine unit cost and unit gross profit for each product if Bean allocates joint costs using the sales value at split-off method. 3. Which of The Bean’s products should be processed further?

Answer 1

Part-1 Allocation of Joint Cost on Physical Measure Method Basis - The Bean Company
	Premium	Gourmet	Quality	Total
Units of Production (a)	24,000,000	38,800,000	4,800,000	67,600,000
Percentage (b)	35.50%	57.40%	7.10%
Allocated Joint Cost (c=Joint Cost Xb)	$56,804,734	$91,834,320	$11,360,947	$160,000,000
Seperable Cost (d )	$23,000,000.00	$21,000,000.00	$19,000,000.00	$63,000,000
Total Cost (f=d+c)	$79,804,733.73	$112,834,319.53	$30,360,946.75	$223,000,000
Unti cost (f/ a)	$3.33	$2.91	$6.33
Sales Price per Pound	$5.00	$3.00	$1.00
Unti Gross Profit ( Sales Price - unit Cost)	$1.67	$0.09	-$5.33

Part-2 Allocation of Joint Cost on Sale Value at Spllit off Point basis
	Premium	Gourmet	Quality	Total
Units of Production & Sold (a)	24,000,000	38,800,000	4,800,000	67,600,000
Sales Price (b)	$3.00	$2.00	1
Sales Value (aXb)	$72,000,000	$77,600,000	$4,800,000	$154,400,000
Percentage ( c)	46.63%	50.26%	3.11%
Allocated Joint Cost( d=Joint cost *c)	$74,611,399	$80,414,508	$4,974,093	$160,000,000
Seperable Cost (e )	$23,000,000.00	$21,000,000.00	$19,000,000.00	$63,000,000
Total Cost (f=d+e)	$97,611,398.96	$101,414,507.77	$23,974,093.26	$223,000,000
Unti cost (f/ a)	$4.07	$2.61	$4.99
Sales Price per Pound	$5.00	$3.00	$1.00
Unti Gross Profit ( Sales Price - unit Cost)	$0.93	$0.39	-$3.99