The South Oil Company buys crude vegetable oil Refining this oil results in four
ID: 2485290 • Letter: T
Question
The South Oil Company buys crude vegetable oil Refining this oil results in four products at the split off point A, B C and D Product C is fully processed by the spilt of F point Products A B and D can individually be further refined into Super A. Super B and Super D Data related to December are: Requirements 1. Compute the gross margin percentage for each product sold in December, using the following methods for allocating the S80.000 joint costs: a. Sales value at split off b. Physical measure c. NRV 2 Could South have increased its December operating income by making different decisions about the further processing of products A. B, or 0? Show the effect on operating income of any changes you recommend. Requirement 1. Compute the gross margin percentage for each product sold in December, using the different methods for allocating the $80.000 joint costs. a Sales Value at Split off. Begin by entering the amounts in the table and allocate the joint costs. (Enter the weightings to four decimal places.) Compute the gross margin percentage using the sales value at split off method to allocate the joint costs. (Enter an amount in each input cell Round the percentages to two decimal places. X.XX%. Use parentheses or a minus sign when entering negative amounts) b. Allocate the joint costs using the physical-measure method Enter the amounts in the table and allocate the joint costs. (Enter the weightings to four decimal places.) Compute the gross margin percentage using the physical-measures method to allocate the joint costs (Enter an amount in each input cell Round the percentages to two decimal places. X XX%. Use parentheses or a minus sign when entering negative amounts) c. Allocate the joint costs using the net realizable value method. Enter the amounts in the table and allocate the joint costs. (Enter the weightings to four decimal places.) Compute the gross margin percentage using the NRV method to allocate the joint costs. (Enter an amount in each input cell. Round the percentages to two decimal places, X.XX%. Use parentheses or a minus sign when entering negative amounts) Requirement 2. Could South 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 Determine the formula you will use to make your decision Then enter the amounts for each product and determine the effect on operating income of the decision (Enter negative effects with parentheses or a minus sign.) Requirement 2. Could South 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 Determine the formula you will use to make your decision. Then enter the amounts for each product and determine the effect on operating income of the decision. (Enter negative effects with parentheses or a minus sign.)Explanation / Answer
It is a problem on Joint cost. Firm is processing crude vegetable oil. Four products are found. They are A,B,C and D. Out of these four products, C dose not requires any post split off processing work. However A, B and D can be processed further to super A, Super B and Super C stage. Each products sale value before and after post split off stage are available. Joint cost is $80,000.
Here first task is to distribute joint cost on four products using some appropriate method. First method allocates pre split off cost on sale value before processing ratio. It is shown below:
Sales value of
total production
at split off
Joint cost
allocated
Gross margin of each item, after such allocation of joint cost is shown below:
Gross margin % for each product sold in December
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Part (b) Now joint cost is allocated on the basis of physical units produced. The allocation is shown below:
Physical measure of
total production
Joint cost
allocated
After such distribution, gross profit percentage is shown below:
Gross margin % for each product sold in December
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(c) Third method of joint cost allocation is known as residual net realizable value. It is post processing sale value minus separable cost. Allocation on this basis is shown below.
Net realizable
value
Joint cost
allocated
Gross profit percentage in this method is shown below:
Gross margin % for each product sold in December
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Answer part 2:
Now firm has to decide whether post split off processing is beneficial or not. For this following steps are used.
1. Consider sale value at split off point and sale value after further processing. Identify increase in sale value due to further processing.
2. Now deduct sdeparable after split off cost from the difference of point 1. If the balance is positive then after split off processing will add value. Otherwise reject it. This analysis is shown below:
Increase in Revenue
due to post split off
processing
Seperable
post split off
cost
Effect on operating income
from further processing
The result of above table is showing that due to post split of processing, B and D has reduced profit of the concern. So best decision is to process A into super A. But doot process B or D. Sale them at split off point.
It will increase operating profit by 25,000+18,000=$43,000 if B and D are sold at split off point
ProductSales value of
total production
at split off
WeightingJoint cost
allocated
A $45,000 0.25 80,000x0.25=$20,000 B 27,000 0.15 80,000x0.15=$12,000 C 63,000 0.35 80,000x0.35=$28,000 D 45,000 0.25 80,000x0.25=$20,000 Total $180,000 1.00 =$80,000Related Questions
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