Question

The Happy Cow manufacturing (THC) makes different types of cheeses and related products. Its most famous cheese is Queso Fresco. In order to make one pound of Queso Fresco, it requires 5 quarts of milk. THC processes milk in batches of 20,000 quarts. These 20,000 quarts of milk also yield whey, a common food supplement. For every quart, the milk will yield 1.75 pounds of whey. THC pays $1.5 for each gallon of milk. They make one batch per month. Each pound of cheese could be sold for $10/lbs, and each pound of whey could be sold for $1.5/lbs.

Note: there are 4 quarts in each gallon.

THC decides to process the Queso Fresco further and make and sell cheese fritters. THC would incur extra cost in operating the frying station and paying for the ingredients to make the fritters, it will incur a total of $10,000 per month to make this delicious treat. For each pound of cheese, they can produce 5 fritters that could be sold as a bundle of 4 for $12. At the same time, THC will go ahead and also process the whey further to produce Xanthan gum, a very popular food thickener used mostly in gluten-free flour. There is some loss in the process, so for every pound of whey processed, only 0.75 lbs of Gum is obtained. The price/lb of Gum is $4 and THC would incur an additional $5,000 expense for the process.

Under the NRV method, how much joint cost would be allocated to Xanthan gum?

Answer 1

To Process 1 batch 20,000 quarts of milk is required. One Gallon of milk has 4 Quarts. Thus Total gallon will be 20,000/4 = 5,000 Gallons

Price of each Gallon of milk is $1.50

Total Joint Cost = 5000 * 1.50 = $7500

Total Pounds of Queso Fresco produced at split off point = 20,000 / 5 = 4,000 Pounds

Number of fritters = 5 * 4000 = 20,000

No. Bundle of 4 Fritters = 20,000 / 4 = 5000 Bundles

Sale Price of one bundle is $12.

Thus total Sale Price of Fritters is = 5000 * 12 = $60,000

Total Pounds of whey produced at split off point = 20,000 Quarts * 1.75 = 35,000 Pounds

Pounds of Xanthan gum = 35000 * 0.75 = 26,250 pounds

Sale Price per pound of Xanthan gum = $4

Total Sale Price of Xanthan gum = 26,250 * 4 = $105,000

	Fritters	Xanthan gum
Sale Value	60000	105000
Cost to Further Process	10000	5000
NRV at Split off Point	50000	100000

Joint Cost to be allocated to Xanthan gum = 7500 * 10/15 = $5000