(TCO 7) Products Gamma and Delta are joint products. The joint production cost o
ID: 2377264 • Letter: #
Question
(TCO 7) Products Gamma and Delta are joint products. The joint production cost of the products is $800. Gamma has a market value of $500 at the split-off point. If Gamma is further processed at an additional cost of $600, its market value is $1,400. Product Delta has a market value of $1,100 at the split-off point. If Product Delta is further processed at an additional cost of $300, its market value is $1,400. Using the relative sales value method, calculate the joint product cost that would be allocated to Gamma and Delta. How do you know if one of the products should be further processed?>style="font-family: arial; font-size: 13px;">
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Answer found:
1.Net Present Value = Cash Inflow-Outflow/(1+i)^t
=600000-300000/(1+0.09)^8
=$150559.8839
Company should not proceed with project as it's NPV is just about half it's initial investment.
Explanation / Answer
Cost Allocation:
Product gamma = [500/(500+1100)] * 800 =250
Product delta = [1100/(500+1100)] =550
550+250=800
Income Statement: Product A Product B Total
Sales 500 1100 1600
Cost of goods 250 550 800
-_____ -_____ -_____
Gross Margin 250 550 800
Gross Margin %:
Product gamma: 250/500= 50%
Product delta:550/1100= 50%
Total: 800/1600= 50%
The company should not proceed at half the initial investment.
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