Question

Ag-Coop is a large farm cooperative with a number of agriculture-related manufacturing and service divisions. As a cooperative, it pays no federal income taxes. The company owns a fertilizer plant that processes and mixes petrochemical compounds into three brands of agricultural fertilizer: greenup, maintane, and winterizer. The three brands differ with respect to selling price and the proportional content of basic chemicals.

Ag-Coop’s Fertilizer Manufacturing Division transfers the completed product to the cooperative’s Retail Sales Division at a price based on the cost of each type of fertilizer plus a markup.

The Manufacturing Division is completely automated so that the only costs it incurs are the costs of the petrochemical feedstocks plus overhead that is considered fixed. The primary feedstock costs $1.50 per pound. Each 100 pounds of feedstock can produce either of the following mixtures of fertilizer.

	Output Schedules (in pounds)
	A	B
Greenup	60	70
Maintane	30	20
Winterizer	10	10

Production is limited to the 850,000 kilowatt-hours monthly capacity of the dehydrator. Due to different chemical makeup, each brand of fertilizer requires different dehydrator use. Dehydrator usage in kilowatt-hours per pound of product follows:

Product	Kilowatt-Hour Usage per Pound
Greenup	35
Maintane	28
Winterizer	46

Monthly fixed costs are $90,000. The company currently is producing according to output schedule A. Joint production costs including fixed overhead are allocated to each product on the basis of weight.

The fertilizer is packed into 100-pound bags for sale in the cooperative’s retail stores. The sales price for each product charged by the cooperative’s Retail Sales Division follows:

	Sales Price per Pound
Greenup	$	11.00
Maintane		9.50
Winterizer		10.90

Selling expenses are 20 percent of the sales price.

The Retail Sales Division manager has complained that the prices charged by the Manufacturing Division are excessive and that he would prefer to purchase from another supplier.

The Manufacturing Division manager argues that the processing mix was determined based on a careful analysis of the costs of each product compared to the prices charged by the Retail Sales Division.

Required:

a. Assume that joint production costs including fixed overhead are allocated to each product on the basis of weight. What is the cost per pound of each product, including fixed overhead and the feedstock cost of $1.50 per pound, given the current production schedule? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Assume that joint production costs including fixed overhead are allocated to each product on the basis of net realizable value if sold through the cooperative’s Retail Sales Division. What is the allocated cost per pound of each product, given the current production schedule? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. Assume that joint production costs including fixed overhead are allocated to each product on the basis of weight. Calculate the operating profit under both Schedule A and Schedule B. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer 1

1. Allocated cost per pound =$5.1

	Output mix	kilowatt hour per pound	Kilowatt-hour per 100 pounds input
Greenup	60	35	2,100
Maintane	30	28	840
Winterizer	10	46	460
			3,400

Maximum processing =850,000/3,400/100 =25,000 pounds of input

Fixed allocation =$90,000/25,000=$3.6 per pound

Feed stock cost =$1.50

Joint cost =$5.1

B.)

Allocation cost
Greenup	$5.32
Maintane	$4.59
Winterizer	$5.27

Quantities of each product produced

Greenup (25,000×60%) =15,000

Maintane (25,000×30%) =7,500

Winterizer (25,000×10%) =2,500

	Sale price/pound	selling cost/pound (20% of sale price)	NRV/pound(a)	no of pounds (b)	Total NRV
Greenup	$11	$2.2	$8.8	15,000	$132,000
Maintane	$9.50	$1.9	$7.6	7,500	$57,000
Winterizer	$10.90	$2.18	$8.72	2,500	$21,800
				25,000	$210,800

Total joint cost =$90,000+ (25,000×$1.50)=$127,500

Allocated cost

Greenup =($127,500×$132,000/$210,800/15,000) =$5.32

Maintane =($127,500×$57,000/$210,800/7,500)=$4.59

Winterizer=($127,500×$21,800/$210,800/2,500)=$5.27

C. Profit under production schedule A

Total net realizable value =$210,800

Less: Joint cost incurred. =$127,500

Profit =$83,300

Outputs under production schedule B

	Output mix	Kilowatt-hour per pound	Kilowatt-hour per 100 pounds input
Greenup	70	35	2,450
Maintane	20	28	560
Winterizer	10	46	460
			3,470

Maximum Processing =850,000/3,470/100 =24,496

Quantities of each product produced

Greenup =(24,496×70%)=17,147

Maintane=(24,496×20%)=4,899

Winterizer=(24,496×10%) =2,450

Total=24,496

Profit under Schedule B=(17,147×$8.8)+(4,889×$7.6)+(2,450×$8.72)-(24,496×$1.50)-$90,000

=$209,414-$36,744-$90,000

=$82,670

_____×_____

All the best