Question

Allocating Joint Costs Using the Constant Gross Margin Method

A company manufactures three products, L-Ten, Triol, and Pioze, from a joint process. Each production run costs $12,900. None of the products can be sold at split-off, but must be processed further. Information on one batch of the three products is as follows:

Product	Gallons	Further Processing Cost per Gallon	Eventual Market Price per Gallon
L-Ten	3,500	$0.50	$ 2.00
Triol	4,000	1.00	5.00
Pioze	2,500	1.50	6.00

Required:

1. Calculate the total revenue, total costs, and total gross profit the company will earn on the sale of L-Ten, Triol, and Pioze.

Total Revenue	$
Total Costs	$
Total Gross Profit	$

2. Allocate the joint cost to L-Ten, Triol, and Pioze using the constant gross margin percentage method. Round the gross margin percentage to four decimal places and round all other computations to the nearest dollar.

	Joint Cost
Product	Allocation
L-Ten	$
Triol
Pioze
Total	$

(Note: The joint cost allocation does not equal $12,900 due to rounding.)

3. What if it cost $2 to process each gallon of Triol beyond the split-off point? How would that affect the allocation of joint cost to these three products? Round the gross margin percentage to four decimal places and round all other computations to the nearest dollar.

	Joint Cost
Product	Allocation
L-Ten	$
Triol
Pioze
Total	$

(Note: The joint cost allocation does not equal $12,900 due to rounding.)

Answer 1

ANSWER

1)
Product	Gallons	Further costs	Further costs
L Ten	3,500.00	0.50	1,750.00
Triol	4,000.00	1.00	4,000.00
Pioze	2,500.00	1.50	3,750.00
Joint costs		12,900.00
Total costs		22,400.00
Product	Gallons	Market Price	Market Value
L Ten	3,500.00	2.00	7,000.00
Triol	4,000.00	5.00	20,000.00
Pioze	2,500.00	6.00	15,000.00
Total Revenue		42,000.00		A
Total Revenue		42,000.00
Total costs		22,400.00
Total gross profit		19,600.00		B
2)
Gross margin percentage	46.6667%		C=B/A
(Total gross profit/ Total Revenue)
	D	E=D*C	F	G=D-E-F
Product	Market Value	Gross margin	Further costs	Joint costs allocated
L Ten	7,000.00	3,267.00	1,750.00	1,983.00
Triol	20,000.00	9,333.00	4,000.00	6,667.00
Pioze	15,000.00	7,000.00	3,750.00	4,250.00
Total				12,900.00
3)
Product	Gallons	Further costs	Further costs
L Ten	3,500.00	0.50	1,750.00
Triol	4,000.00	2.00	8,000.00
Pioze	2,500.00	1.50	3,750.00
Joint costs		12,900.00
Total costs		26,400.00	H
Total Revenue		42,000.00	See A
Total costs		26,400.00	See H
Total gross profit		15,600.00	I=A-H
Gross margin percentage	37.1429%	J=I/A
(Total gross profit/ Total Revenue)
	D	K=D*J	L	M=D-K-L
Product	Market Value	Gross margin	Further costs	Joint costs allocated
L Ten	7,000.00	2,600.00	1,750.00	2,650.00
Triol	20,000.00	7,429.00	8,000.00	4,571.00
Pioze	15,000.00	5,571.00	3,750.00	5,679.00
Total				12,900.00

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