Question

Garden of Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs $50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of $60 per unit and $40 per unit for Dulls. The market price is $250 for Brights and $200 for Dulls.

1. What is the amount of joint costs allocated to Dulls using the physical units method?

2. What is the gross profit for Brights assuming the net realizable value method is used?

3. What is the gross profit for Dulls assuming the constant gross margin percentage method is used?

Answer 1

1. Joint costs allocated to Dulls using physical units method: $40000

	Brights	Dulls	Total
Physical units	250	1000	1250
Joint production costs $			50000
Joint cost allocated $		40000
($50000 x 1000/1250)

2. Gross profit for Brights with net realizable value method: $36054

	Brights	Dulls	Total
Market price per unit $	250	200
Less: Separable costs $	60	40
Net realizable value per unit $	190	160
Number of units	250	1000
Total net realizable value $	47500	160000	207500
Joint production costs $			50000
Joint cost allocated $	11445.78
($50000 x $47500/$207500)
Sales (250 x $250)	62500
Less: Costs $
Joint cost allocated	11446
Separable costs (250 x $60)	15000
Total costs $	26446
Gross profit $	36054

3. Gross profit for Dulls with constant gross margin percentage method: $120000

Total gross margin percentage = (Total revenue - Total costs)/Total revenue

Total revenue = (250 x $250) + (1000 x $200) = $62500 + $200000 = $262500

Total costs = $50000 + (250 x $60) + ($1000 x $40) = $50000 + $15000 + $40000 = $105000

Total gross margin percentage = ($262500 - $105000)/$262500 = $157500/$262500 = 60%

Gross profit for Dull = Market value x Total gross margin percentage = (1000 x $200) x 60% = $200000 x 60% = $120000