Question

Enviro Green Company processes wood pulp into two products. During May the joint costs of processing were $50,000. Production and sales value information for the month were as follows:

Product Kilograms Produced Sales Value at Splitoff Point
Separable Costs

Paper 125,000 $63,000 $221,000 Cardboard 96,000 46,000 262,000


Paper sells for $2.71 a kilogram and cardboard sells for $3.10 a kilogram.

There were no beginning or ending inventories for May.

Required: 1) Determine the amounts to be allocated to each product using the: a. constant gross margin percentage of NRV method b. physical measure method 2) Should management process these products beyond the splitoff point? Justify your answer. Also comment on how this decision would be affected by the results of the expected profits using the constant gross margin percentage of NRV and physical measure methods.

Answer 1

Solution
Given Details
	A	B	C	D	E= A*D	F=E-C	G = B/A	E-C
Product	Kg	Sales value at split off point	Seperable costs	Sales price per kg	Total Selling price	Net realisable value	Sales vaue per unit at spit off point	Incremental Revenue
Paper	125,000	63,000	221,000	2.71	338,750	117,750	0.50	275,750
Cardboard	96,000	46,000	262,000	3.10	297,600	35,600	0.48	251,600
Totals	221,000	109,000	483,000		636,350	153,350
1a
Total Joint Costs			50,000
Calculation of Gross Margin
Total selling price			636,350
less
Seperable costs		483,000
Joint costs		50,000	533,000
Gross Margin			103,350
Gross Margin %			16.24106231
Allocation of joint costs under constant gross margin percentage of NRV
		Paper	Cardboard	Total
Final sales value		338,750	297,600	636,350
Deduct Gross margin (16.24%)		55,017	48,333	103,350
Total Prodution costs		283,733	249,267	533,000
Seperable costs		221,000	262,000	483,000
Joint cost allocated		62,733	(12,733)	50,000
Under the The negative joint-cost allocation to cardboard illustrates the “unusual” feature of the constant gross-margin percentage NRV method: some products may receive negative cost allocations so that all individual products have the same gross-margin percentage.
1b
Allocation of joint costs under physical measure method
		Paper	Cardboard	Total
Quantity		125,000	96,000	221,000
Ratio		56.56	43.44
Joint cost allocated based		28,281	21,719	50,000
on pysical quantity
2. Management should produce the Paper beyond split off since the incremental revenue is greater than seperable costs based on NRV method.
The cardboard should be sold at split off point only as the sperable costs are greater than the incremental revenue.
		Gross Margin Method		Physical method
		Paper	Cardboard	Paper	Cardboard
Joint costs		62,733	(12,733)	28,281	21,719
Sales value at spit off point		63,000	46,000	63,000	46,000
Notional profit		267	58,733	34,719	24,281
If processed further
Seperable costs		221,000	262,000	221,000	262,000
Selling price		338,750	297,600	338,750	297,600
Notional profit		55,017	48,333	89,469	13,881
The profit is higher for Cardboard at split off point under both the methods
The profit is higher for Paper on further processing beyond spit off point since the incremental revenue is higher.