A factory sells Red Cars, Silver Cars and White Cars. At split-off all cars are

Question

A factory sells Red Cars, Silver Cars and White Cars. At split-off all cars are painted White, but after split-off another few layers of paint are put on the Red Cars and Silver Cars. Thus, White Cars are sold at split-off, but Red Cars and Silver Cars are processed further. If Red Cars, Silver Cars, and White Cars all have different sales prices, then which method would you recommend that the company use to allocate joint costs to these joint products? (Hint: The details you are provided with can be best used to justify using which method?) APhysical Units Method O B Weighted Average Method O CSales-Value-at-Split-Off Method O D Net Realizable Value Method

Explanation / Answer

B) Weighted Average Method will be the right method, as all three cars have different sales prices. Plus White cars sells at split off, hence a different weight needs to be assigned as compared to Red and Silver car. Red and Silver may carry same weight, but different prices.

Sw = sales price for white car, Ww = weight assigned for white car

Sr = sales price for red car, Wr = weight assigned for red car

Ss = sales price for silver car, Ws = weight assigned for silver car

So Joint Sales price = ((Sw* Ww) + (Sr*Wr) + (Ss*Ws))/ (Ww+Wr+Ws)

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