Question

Efrem Food Products Inc. (EFPI) produces various food products. One of its joint products is soybean that is processed in a joint manufacturing process to produce Soybean Oil and the Meal. The total cost of input and joint manufacturing process is estimated to be $400,000 for 2020. During the year the company expects to produce 45,000 units of Soybean Oil and 35,000 units of Meal. The company has an option to sell Soybean Oil and the Meal at the split-off point for $10 and $15 per unit respectively. Required: (please round all cost calculations to two decimal places – e.g. $6.54)

1. Allocate the joint manufacturing cost to Soybean Oil and the Meal using the physical unit method.

2. Allocate the joint manufacturing cost to Soybean Oil and the Meal using the sales value method.

3. An Aged Care facility approached EFPI and offered to buy the Meal at a price of $17 per unit provided the company agrees to further process the product. The accountant of EFPI advised that it would cost $60,000 to further process the Meal. As a qualified management accountant, you are required to evaluate and advise EFPI whether the offer from the Aged Care facility should be accepted or rejected on financial grounds. Show computations to support your answer. .

Answer 1

1. Physical Unit Method:

Product	Physical Units	Allocation Ratio	Allocation of Joint Cost
Soybean Oil	45000	56.25%	$                            225,000
Meal	35000	43.75%	$                            175,000
Total	80000	100.00%	$                            400,000

2. Sales Value Method:

Product	Physical Units	Sales Price per Unit	Sales Value at Split-Off	Allocation Ratio	Allocation of Joint Cost
Soybean Oil	45000	$                                10	$                            450,000	46.15%	$                            184,600
Meal	35000	$                                15	$                            525,000	53.85%	$                            215,400
Total	80000		$                            975,000	100.00%	$                            400,000

The allocation ratios have been rounded off to 2 decimal places in the absence of instructions regarding the same. Kindly round off as required since answers may vary due to any other rounding off. For clarifications, write under the comments section.

3.

Incremental revenue from further processing [35000 x ($17 - $15)]	$       70,000
Incremental cost of further processing	$       60,000
Incremental profit	$       10,000

The offer from Aged Care facility should be accepted as it would result in an incremental profit of $10000.