Question

The South 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:

Requirements:

Compute the? gross-margin percentage for each product sold in? December, using the following methods for allocating the $100,000 joint? costs:

a.	Sales value at splitoff
b.	?Physical-measure
c.	NRV

2. Could South 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.

Product? A, 300,000 gallons
	Product? B, 100,000 gallons
	Product? C, 50,000 gallons
	Product? D, 50,000 gallons

The joint costs of purchasing and processing the crude vegetable oil were $100,000. South had no beginning or ending inventories. Sales of product C in December were $50,000.

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	$100,000	$200,000
Super B	80,000	100,000
Super D	95,000	125,000

South 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:

	Product? A, $50,000
	Product? B, $30,000
	Product? D, $70,000

Answer 1

Solution 1a:

Allocation of Joint Cost & Computation of Gross Margin - Sale Value at Split off Point
Particulars	Super A	Super B	C	Super D	Total
Sale Value at Split off point	$50,000	$30,000	$50,000	$70,000	$200,000
Allocation of Joint Cost A - 100000*50/200 B - 100000*30/200 C - 100000*50/200 C - 100000*70/200	$25,000	$15,000	$25,000	$35,000	$100,000
Sales (A)	$200,000.00	$100,000.00	$50,000.00	$125,000.00	$475,000.00
Joint Cost (B)	$25,000	$15,000	$25,000	$35,000	$100,000
Further Processing Cost ( C )	$100,000.00	$80,000.00	$0.00	$95,000.00	$275,000.00
Gross Margin (D) (A-B-C)	$75,000	$5,000	$25,000	-$5,000	$100,000

Solution 1b:

Allocation of Joint Cost & Computation of Gross Margin - Physical measure method
Particulars	Super A	Super B	C	Super D	Total
Output at split off point	$300,000.00	$100,000.00	$50,000.00	$50,000.00	$500,000.00
Allocation of Joint Cost (4:2:1:1) A - 100000*3/5 B - 100000*1/5 C - 100000*0.5/5 C - 100000*0.5/5	$60,000.00	$20,000.00	$10,000.00	$10,000.00	$100,000.00
Sales (A)	$200,000.00	$100,000.00	$50,000.00	$125,000.00	$475,000.00
Joint Cost (B)	$60,000.00	$20,000.00	$10,000.00	$10,000.00	$100,000.00
Further Processing Cost ( C )	$100,000.00	$80,000.00	$0.00	$95,000.00	$275,000.00
Gross Margin (D) (A-B-C)	$40,000.00	$0.00	$40,000.00	$20,000.00	$100,000.00

Solution 1c:

Allocation of Joint Cost & Computation of Gross Margin - NRV Method
Particulars	Super A	Super B	C	Super D	Total
Sale Value after further processing	$200,000.00	$100,000.00	$50,000.00	$125,000.00	$475,000
Further Processing Cost	$100,000	$80,000	$0	$95,000	$275,000
Net Realisable Value	$100,000	$20,000	$50,000	$30,000	$200,000
Allocation of Joint Cost A - 100000*100/200 B - 100000*20/200 C - 100000*50/200 C - 100000*30/200	$50,000	$10,000	$25,000	$15,000	$100,000
Sales (A)	$200,000.00	$100,000.00	$50,000.00	$125,000.00	$475,000
Joint Cost (B)	$50,000	$10,000	$25,000	$15,000	$100,000
Further Processing Cost ( C )	$100,000.00	$80,000.00	$0.00	$95,000.00	$275,000.00
Gross Margin (D) (A-B-C)	$50,000	$10,000	$25,000	$15,000	$100,000

Solution 2:

Statement Showing Comparison of Further Processing & Sale at Split off
Particulars	Product A	Product B	Product D
Sale Value after further processing	$200,000.00	$100,000.00	$125,000.00
Further Processing cost	$100,000.00	$80,000.00	$95,000.00
Net Realisable Value for further Processing Option (A)	$100,000.00	$20,000.00	$30,000.00
Net Realizable value for sale at Split off (B)	$50,000.00	$30,000.00	$70,000.00
Net Incremental profit for further processing (A-B)	$50,000.00	-$10,000.00	-$40,000.00
Decesion	Further process	Sold at split off	Sold at split off

Computation of net income - If products A is further processed and other products sold at Split off Point
Particulars	Product A	Product B	Product C	Product D	Total
Sale Value	$200,000.00	$30,000.00	$50,000.00	$70,000.00	$350,000.00
Further processing cost	$100,000.00	$0.00	$0.00	$0.00	$100,000.00
Joint cost					$100,000.00
Net Income					$150,000.00
Net income before change in decesion of further processing					$100,000.00
Net Increase in Income					$50,000.00