Question

The Rainbow Oil Company buys crude vegetable oil. Refining this oil results in four products at the splitoff point.​ A, B,​ C, and D. Product C is fully processed by the splitoff point. Products​ A, B, and D can individually be further refined into Super​ A, Super​ B, and Super D. In the most recent month​ (December), the output at the splitoff point was as​ follows:

times •	Product​ A, 275,000 gallons
times •	Product​ B, 100,000 gallons
times •	Product​ C, 75,000 gallons
times •	Product​ D, 50,000 gallons

The joint costs of purchasing and processing the crude vegetable oil were

$105,000. Rainbow had no beginning or ending inventories. Sales of product C in December were $45,000. Products​ A, B, and D were further refined and then sold. Data related to December are as​ follows:

	Separable Processing Costs
	to Make Super Products	Revenues
Super A	$240,000	$375,000
Super B	60,000	150,000
Super D	45,000	75,000

Rainbow had the option of selling products​ A, B, and D at the splitoff point. This alternative would have yielded the following revenues for the December​ production:

times •	Product​ A, $ 75 comma 000$75,000
times •	Product​ B, $ 62 comma 500$62,500
times •	Product​ D, $ 67 comma 500$67,500

1.	Compute the​ gross-margin percentage for each product sold in​ December, using the following methods for allocating the $105,000 joint​ costs:
	a. Sales value at splitoff b. ​Physical-measure c. NRV
2.	Could Rainbow have increased its December operating income by making different decisions about the further processing of products​ A, B, or​ D? Show the effect on operating income of any changes you recommend.

Answer 1

Answer 1-a. Sales Value at Splitoff
Computation of Joint Cost Allocations
Product	Sales Value of Total Production at Split-off	Weighting	Allocation of Joint Costs
A	75,000.00	30%	31,500.00
B	62,500.00	25%	26,250.00
C	45,000.00	18%	18,900.00
D	67,500.00	27%	28,350.00
	250,000.00	100%	105,000.00
Computation of Gross Margin Percentage
	Super A	Super B	C	Super D	Total
Revenues	375,000.00	150,000.00	45,000.00	75,000.00	645,000.00
Joint Costs	31,500.00	26,250.00	18,900.00	28,350.00	105,000.00
Separable Costs	240,000.00	60,000.00	-	45,000.00	345,000.00
Total Cost of Goods Sold	271,500.00	86,250.00	18,900.00	73,350.00	450,000.00
Gross Margin	103,500.00	63,750.00	26,100.00	1,650.00	195,000.00
Gross Margin Percentage	27.60%	42.50%	58.00%	2.20%	30.23%
Answer 1-b. Physical measure Method
Product	Physical Measure of Total Production (In Gallons)	Weighting	Allocation of Joint Costs
A	275,000.00	55%	57,750.00
B	100,000.00	20%	21,000.00
C	75,000.00	15%	15,750.00
D	50,000.00	10%	10,500.00
Total	500,000.00	100%	105,000.00
Computation of Gross Margin Percentage
	Super A	Super B	C	Super D	Total
Revenues	375,000.00	150,000.00	45,000.00	75,000.00	645,000.00
Joint Costs	57,750.00	21,000.00	15,750.00	10,500.00	105,000.00
Separable Costs	240,000.00	60,000.00	-	45,000.00	345,000.00
Total Cost of Goods Sold	297,750.00	81,000.00	15,750.00	55,500.00	450,000.00
Gross Margin	77,250.00	69,000.00	29,250.00	19,500.00	195,000.00
Gross Margin Percentage	20.60%	46.00%	65.00%	26.00%	30.23%
Answer 1-c. NRV Method
Product	Final Sales Value of Total Production	Separable Costs	NRV at Splitoff	Weighting	Allocation of Joint Costs
Super A	375,000.00	240,000.00	135,000.00	45%	47,250.00
Super B	150,000.00	60,000.00	90,000.00	30%	31,500.00
C	45,000.00	-	45,000.00	15%	15,750.00
Super D	75,000.00	45,000.00	30,000.00	10%	10,500.00
Total	645,000.00	345,000.00	300,000.00	100%	105,000.00
Computation of Gross Margin Percentage
	Super A	Super B	C	Super D	Total
Revenues	375,000.00	150,000.00	45,000.00	75,000.00	645,000.00
Joint Costs	47,250.00	31,500.00	15,750.00	10,500.00	105,000.00
Separable Costs	240,000.00	60,000.00	-	45,000.00	345,000.00
Total Cost of Goods Sold	287,250.00	91,500.00	15,750.00	55,500.00	450,000.00
Gross Margin	87,750.00	58,500.00	29,250.00	19,500.00	195,000.00
Gross Margin Percentage	23.40%	39.00%	65.00%	26.00%	30.23%
Answer 2.
	Further Processing of
	A Into Super A	B Into Super B	D Into Super D
Incremental Revenue	300,000.00	87,500.00	7,500.00
Incremental Cost	240,000.00	60,000.00	45,000.00
Incremental Operating Income (Loss) from Further Processing	60,000.00	27,500.00	(37,500.00)