Use the normal net profit method; account for the removal, additional processing

Question

Use the normal net profit method; account for the removal, additional processing costs, and sale of by-products that require further processing; compute the profit from the sale of a by-product; decide whether to sell at the point of separation or process further. (Objs. 2, 4, 5, 6). The Palmer Company manufactures a material used in refrigerators. A by-product is recovered in the Cooling Department. The by-product is further processed and is sold under the brand name Frost Foam. During the month of July total costs incurred in the Cooling Department were as follows: ) Materials Labor Overhead $300,000 80,000 100,000 During the month a total of 8,000 pounds of materials were processed. Of this total, 7,600 pounds were transferred to finished goods and 400 pounds of by-product were

Explanation / Answer

1 Company assigns only the additional processing cost to by-product a A Sales revenue from 400 pounds of by-product $            5,300 ($13.25*400) B Additional labor cost(400*2) $800 C Additional overhead cost(400*1) $400 D Selling costs (400*1.5) $600 E=B+C+D Total costs $1,800 F=A-E Profit resulting from the sale $            3,500 b Cost per pound of the main product: A Total quantity of main product produced 7600 pounds B Total cost of production $480,000 (300000+80000+100000) C=B/A Cost per pound of the main product: $63.16 2a Common cost to be assigned to the by product Total joint costs before separation $480,000 Profit margin=10% of sales (Sales Revenue-480000)=0.1*Sales Revenue Sales Revenue=480000/0.9= $ 533,333.33 Total Profit Margin=0.1*533333.33 $    53,333.33 Sales Price of By product at point of separation $2,800 (7*400) Profit Margin of by product at point of separation $280 (0.1*2800) Common cost allocated to by product $2,520 (280/53333.33)*480000 Common cost to be assigned to the by product $2,520 2b. Additional costs after separation $1,200 (3*400) Selling cost $600 (1.5*400 Total costs $4,320 (2520+1200+600) Sales Revenue $            5,300 Profit resulting from sale of 400 pounds of Frost Foam $                980 (5300-4320) 2c Cost of producing main product $477,480 (480000-2520) Total Quantity of main product produced 7600 pounds Cost per pound of the main product: $62.83 (477480/7600) 2d The company was right in further processing the by-product Additional sales revenue per pound by further processing $6.25 (13.25-7) Additional cost incurred per pound $4.50 (2+1+1.5) Additional Profit per pound for taking this decision $1.75 (6.25-4.50) Total additional profit=400*1.75 $700

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