Oregon Forests uses a joint process to manufacture two grades of wood: A and B.

Question

Oregon Forests uses a joint process to manufacture two grades of wood: A and B. During October 2013, the company incurred $15,419,690 of joint production cost in producing 28,231,000 board feet of Grade A and 9,378,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet of lumber produced. The company can sell Grade A lumber at the split-off point for $0.74 per board foot. Alternatively, Grade A lumber can be further processed at a cost of $0.73 per board foot and then sold for $1.54 per board foot. No opportunity exists for processing Grade B lumber after split-off.

a. How much joint cost should be allocated to Grade A and to Grade B lumber?

b. If Grade A lumber is processed further and then sold, what is the incremental effect on Oregon Forest’ net income?

Should the additional processing be performed?

Explanation / Answer

a).

Board per feet=$15,419,690/37,609,000=$0.41

Grade A-production cost=$0.41*28,231,000=$11,574,710

Grade B-Production Cost=$0.41*9,378,000=$3,844,980

At split off net income=($0.74-$0.41)*28,231,000=$9,316,230

2) Grade A net income after further cost=($1.54-$0.73-$0.41)*28,231,000=$11,292,400

after further cost the net income incraesed the further process can be done

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