Question

Cotopaxi makes backpacks. Traditionally, they bought fabric in quantity, and cut out the forms for their backpacks from large pieces, discarding the interstitial material as scrap. Due to the integrated nature of the production facility, the cost of all this fabric was considered a joint cost, allocated by the approximate relative sales value method, and the scraps were considered a waste by-product.

Recently however, an enterprising employee had the great idea to use these scraps and make small, unique bags from the heretofore-discarded pieces of fabric. The company agreed to implement this idea on a trial basis, and the accounting department decided to consider these bags a by-product using the net realizable value method.

The marketing department set the price for the by-product bags at $50, and in the first year of production, 10,000 of these scrap bags were sold. At the end of the first year, the accounting department determined that each bag incurred an additional processing cost of $40 on average in additional materials (straps, buckles, thread, etc.), labor, and variable overhead (not including the cost of the scrap fabric from whence they came).

What happened to the joint cost of fabric allocated to the main product lines when the new by-product bags were introduced?

Increased the joint costs allocated to the other products

Decreased the joint costs allocated to the other products

No change in joint costs allocated to the other products What did this new line of by-product bags do to the recognized profitability of Cotopaxi’s main backpack products? Increased the profitability of the main products Decreased the profitability of the main products No change in the profitability of the main products What did this new line of by-product bags do to the total profitability of Cotopaxi’s as a whole? (Note: assume the new bags only incurred the variable costs listed above) Increased overall profitability Decreased overall profitability No change to overall profitability

Answer 1

• increased the joint costs allocated to the other products.

• decreased the probability of the main products.

• decreased overall probability..

Because...