Harper Chicken Corporation processes and packages chicken for grocery stores. It
ID: 3144072 • Letter: H
Question
Harper Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 12,000 pounds of raw chicken that costs $7,000, the company produces two parts: 2,800 pounds of drumsticks and 4,200 pounds of breast for a processing cost of $2,450. The chicken breast is further processed into 3,200 pounds of steak for a processing cost of $2,000. The market price of drumsticks per pound is $1.25 and the market price per pound of chicken steak is $4.20. If Harper decided to sell chicken breast instead of chicken steak, the price per pound would be $2.20.
Required
a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.
a-2. Calculate the gross margin for each product.
a-3. If the drumsticks are producing a loss, should that product line be eliminated?
b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.
b-2. Calculate the gross profit for each product.
c-1. Should Harper further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).
c-2. How would the profit be affected by your answer in c-1?
Explanation / Answer
a-1
Allocation cost = Joint cost / Total No. of pounds of Drumsticks and chicken breast
= (7000+$2,450 / (2800+4200)
= $1.35
a-2.
a-3.
No the drumstricks should no be eliminated since it is contibuting for recovery of joint cost
b-1.
Allocation rate = 9450 / [(2800*1.25) + (4200*2.20)]
= $0.742
b-2.
Product Allocation Rate x Weight of Base = Allocated cost Drumsticks $1.35 x 2800 = $3780 Chicken Breast $1.35 x 4200 = $5670 Total allocated cost $9450Related Questions
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