Question

The Sunny 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. Data related to December​ are:

The output at the splitoff point​ was:

Product A	400,000 litres
Product B	200,000 litres
Product C	100,000 litres
Product D	100,000 litres

The joint costs of purchasing and processing the crude vegetable oil were $200,000. Sunny had no beginning or ending inventories. Sales of product C in December were $100,000. Products​ A, B, and D were further refined and then sold. Data related to December​ are:

	Separable Processing
	Costs to Make
	Super Products	Sales
Super A	$290,000	$450,000
Super B	110,000	150,000
Super D	90,000	150,000

Sunny 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	$140,000
Product B	80,000
Product D	40,000

Requirements

1. Compute the gross margin percentage for each product sold in​ December, using the following methods for allocating the $200,000 joint​ costs:

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

2. Could sunny 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.

Answer 1

Solution 1:

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	$140,000	$80,000	$100,000	$40,000	$360,000
Allocation of Joint Cost A - 200000*140/360 B - 200000*80/360 C - 200000*100/360 C - 200000*40/360	$77,778	$44,444	$55,556	$22,222	$200,000
Sales (A)	$450,000	$150,000	$100,000	$150,000	$850,000
Joint Cost (B)	$77,778	$44,444	$55,556	$22,222	$200,000
Further Processing Cost ( C )	$290,000	$110,000	$0	$90,000	$490,000
Gross Margin (D) (A-B-C)	$82,222	-$4,444	$44,444	$37,778	$160,000

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	$400,000.00	$200,000.00	$100,000.00	$100,000.00	$800,000.00
Allocation of Joint Cost (4:2:1:1) A - 200000*4/10 B - 200000*2/10 C - 200000*1/10 C - 200000*1/10	$100,000.00	$50,000.00	$25,000.00	$25,000.00	$200,000.00
Sales (A)	$450,000.00	$150,000.00	$100,000.00	$150,000.00	$850,000.00
Joint Cost (B)	$100,000.00	$50,000.00	$25,000.00	$25,000.00	$200,000.00
Further Processing Cost ( C )	$290,000.00	$110,000.00	$0.00	$90,000.00	$490,000.00
Gross Margin (D) (A-B-C)	$60,000.00	-$10,000.00	$75,000.00	$35,000.00	$160,000.00

Allocation of Joint Cost & Computation of Gross Margin - NRV Method
Particulars	Super A	Super B	C	Super D	Total
Sale Value after further processing	$450,000	$150,000	$100,000	$150,000	$850,000
Further Processing Cost	$290,000	$110,000	$0	$90,000	$490,000
Net Realisable Value	$160,000	$40,000	$100,000	$60,000	$360,000
Allocation of Joint Cost A - 200000*160/360 B - 200000*40/360 C - 200000*100/360 C - 200000*60/360	$88,889	$22,222	$55,556	$33,333	$200,000
Sales (A)	$450,000	$150,000	$100,000	$150,000	$850,000
Joint Cost (B)	$88,889	$22,222	$55,556	$33,333	$200,000
Further Processing Cost ( C )	$290,000	$110,000	$0	$90,000	$490,000
Gross Margin (D) (A-B-C)	$71,111	$17,778	$44,444	$26,667	$160,000

Solution 2:

Statement Showing Comparison of Further Processing & Sale at Split off
Particulars	Product A	Product B	Product D
Sale Value after further processing	$450,000.00	$150,000.00	$150,000.00
Further Processing cost	$290,000.00	$110,000.00	$90,000.00
Net Realisable Value for further Processing Option (A)	$160,000.00	$40,000.00	$60,000.00
Net Realizable value for sale at Split off (B)	$140,000.00	$80,000.00	$40,000.00
Net Incremental profit for further processing (A-B)	$20,000.00	-$40,000.00	$20,000.00

As there is incremental loss of $40000 if product B is further processed, therefore Product should be sold at split off point and it will increase net overall income by $40,000. If product B will be sold at split off point then operatin income of Sunnly oil company will be $200,000 ($160,000 + $40,000)