Ferguson Metals is a decentralized mining, smelting and metals company with thre

Question

Ferguson Metals is a decentralized mining, smelting and metals company with three divisions: mining, lead, and copper. The mining division owns the ore mines that produces the lead and copper that occur in the vein. Mining removes the ore, crushes it and smelts it to separate the metals from the crushed rock. It then sells the two products to the other two divisions: lead and copper. Each batch mined yeilds 50 tons of lead and 25 tons of copper. One ton is 2,000 pounds. The metals are transferred from mining to the lead and copper division at cost plus a small profit to give mining an incentive to produce. Mining Division Income Statement per Batch *Based on a normal volume of 100 batches per year. Metal Division Income Statement ($000s) *The metal costs exceed the costs of the mining division because some metals are purchased on the open market to expand capacity and to smooth production of the downstream industrial products. The current market price for copper is roughly $0.60 per pound; for leads it is $0.30 per pound. But these prices are for substantially purer copper and lead than the mining division has the ability to produce. Mining could sell its lead in the market at its current purity level for $0.17 per pound. Since the metal divisions are currently incurring the cost to refine the metals to the purity levels they require, management does not believe it is equitable to charge the divisions the current market prices for the unrefined metals. If the metals were transferred at market prices, the lead and copper divisions would be paying twice for the refining process and the mining division would be rewarded for a level of purity it is not providing.

Explanation / Answer

[Joint cost allocation distorting product line profitability]
Partial word problem
Net Realizable Value
(in 000's)

Lead Copper Total

Net income (Table 2)(NNN) NNN-NNNN3000

+ transferred cost* 4200 2100 6300

Net Realizable Value 4500 4800 9300

% 48% 52% 100%

Allocated cost of mining* * 2736 2964
Income based on NRV 1824 -864
ROI

* Transferred cost represent the revenues received by the Mining Division from the Lead and Copper
Divisions. For example, from Table 1, revenue from Mining for lead is $42,000 / batch × 100 batches =
$4.2 million

**Note: $6.3 million includes Mining's profits. The $6.3 million being allocated as a joint cost is the
total revenue to the Mining Division [i.e., from Table 1, ($42,000/batch + $21,000/batch) × 100
batches]. If only Mining's costs are allocated, substitute $5.7 million for the $6.3 million. $5.7 million
100 batches x ($22,000 + $16,000 + $11,000 + $8,000).







Lead sales
- Other costs
- Fixed costs
- Outside metal purchases ($5,000 - 4,200)
Contribution forgone
less: Sale of impure lead†
Net cash flow forgone from selling Lead Division

† $1.7 million = $0.17 × 50 tons/batch × 100 batches/year × 2,000 pounds/ton

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