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 $1.40 per pound. Each 100 pounds of feedstock can produce either of the following mixtures of fertilizer.

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 $1.40 per pound. Each 100 pounds of feedstock can produce either of the following mixtures of fertilizer. Output Schedules (in pounds) A B Greenup 50 60 Maintane 20 10 Winterizer 30 30 Production is limited to the 810,000 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 32 Maintane 22 Winterizer 40 Monthly fixed costs are $81,000. 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 $ 10.50 Maintane 9.00 Winterizer 10.40 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 $1.40 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.)

Production is limited to the 810,000 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	32
Maintane	22
Winterizer	40

Monthly fixed costs are $81,000. 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	$	10.50
Maintane		9.00
Winterizer		10.40

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 $1.40 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

a.

Particulars	Output Mix	KWH per Lb	KWH per 100 Lbs Input
Greenup	50	32	1600
Maintane	20	22	440
Winterizer	30	40	1200
Total			3240

Maximum processing = 810000/3240 KWH = 25000lbs of Input
Fixed allocation cost (81000/25000)	3.24
Feed Stock cost	1.4
Joint Cost	4.64

Hence Total Allocation cost is 4.64

b.

Total joint Cost incurred I in processing 25000lbs input

=81000+(25000X1.4)=116000

Quantity produced
Greenup	25000	0.5	12500
Maintane	25000	0.2	5000
Winterizer	25000	0.3	7500
Total			25000

Particulars	Sales Price	Selling cost (20%)	NRV	No. of lbs	Total NRV
Greenup	10.5	2.1	8.4	12500	105000
Maintane	9	1.8	7.2	5000	36000
Winterizer	10.4	2.08	8.32	7500	62400
Total					203400

c.

Operating profit
						As per Schedule A	As per Schedule B
Particulars	Sales price	Selling cost (20%)	NRV	Prodcution cost	Operating profit/lbs	Quanity Produced	Proportion	Total operating profit	Quanity produced	Proportion	Total operating profit
Greenup	10.5	2.1	8.4	4.64	3.76	25000	0.5	47000	25000	0.6	56400
Maintane	9	1.8	7.2	4.64	2.56	25000	0.2	12800	25000	0.1	6400
Winterizer	10.4	2.08	8.32	4.64	3.68	25000	0.3	27600	25000	0.3	27600
Total					Total			87400			90400