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

Required 1) In case of allocation based on the physical unit method, we calculate the allocation rate per unit as - Joint Costs / (Units of Soyabean Oil + Units of Meal) = $400,000 / (45,000 + 35,000) = $5 per unit

	Total	Soyabean Oil	Meal
Joint Costs	$      400,000	$      225,000	$      175,000
No. of Units	80,000	45,000	35,000
Per unit Cost	$                   5	$                   5	$                   5

Required 2)  In case of allocation based on the sales value method, we calculate the allocation rate per $ of Revenue as - Joint Costs / (Sale Value of Soyabean Oil + Sale Value of Meal) = $400,000 / (45,000 * $10 + 35,000 * $15) = $400,000 / $975,000 = $0.41 per $ of Revenue.

	Total	Soyabean Oil	Meal
No. of Units	80,000	45,000	35,000
Sale Price per unit		$                10	$                15
Sales Revenue	$      975,000	$      450,000	$      525,000
Joint Costs	$      400,000	$      184,615	$      215,385
Per unit Cost	$             0.41	$             4.10	$             6.15

Required 3) The company should accept the offer as it would result in an incremental benefit of $ 10,000 to the company.

Particulars	Amount
Incremental Revenue from acceptance of Offer	$         70,000
[35,000 * ($17 - $15) ]
Incremental Costs from acceptance of Offer	$       (60,000)
Net Benefit from Acceptance of Offer	$         10,000

*** Please comment in case of any doubt or query and i will get back to you. ***

Please hit like if this helps you!