Gross margin
$217,000
$592,000
$809,000
Gross margin percentage
51%
53%
52%
2. Sandra Dashel probably performed the analysis shown below to arrive at the net loss of
$2,435 from marketing the stock:
PANEL A: Allocation of Joint Costs using
Sales Value at Splitoff
Special B/
Beef
Ramen
Special S/
Shrimp
Ramen
Stock
Total
Sales value of total production at splitoff point
(20,000 tons
$5 per ton; 28,000
$20 per
ton; 6,000
$4 per ton)
$100,000
$560,000
$24,000
$684,000
Weighting
($100,000; $560,000; $24,000 ÷ $684,000)
14.6199%
81.8713%
3.5088%
100%
Joint costs allocated
(0.146199; 0.818713; 0.035088
$400,000)
$58,480
$327,485
$14,035
$400,000
PANEL B: Product-Line Income Statement
for June 2014
Special B
Special S
Stock
Total
Revenues
(25,000 tons
$17 per ton; 34,000
$33 per
ton; 6,000
$4 per ton)
$425,000
$1,122,000
$24,000
$1,571,000
Separable processing costs
100,000
238,000
0
338,000
Joint costs allocated (from Panel A)
58,480
327,485
14,035
400,000
Gross margin
$266,520
$556,515
$9,965
$833,000
Deduct marketing costs
12,400
12,400
Operating income
$ (2,435)
$820,600
In this (misleading) analysis, the $400,000 of joint costs are reallocated between Special B, Special
S, and the stock. Irrespective of the method of allocation, this analysis is wrong. Joint costs are
always irrelevant in a process-further decision. Only incremental costs and revenues past the
splitoff point are relevant. In this case, the correct analysis is much simpler: The incremental
revenues from selling the stock are $24,000, and the incremental costs are the marketing costs of
$12,400. So, Fancy Foods should sell the stock—this will increase its operating income by $11,600
($24,000 – $12,400).
16-23 (20 min.) Joint cost allocation: sell immediately or process further.
Illinois Soy Products (ISP) buys soybeans and processes them into other soy products. Each ton
of soybeans that ISP purchases for $340 can be converted for an additional $190 into 575 pounds
of soy meal and 160 gallons of soy oil. A pound of soy meal can be sold at splitoff for $1.24 and
soy oil can be sold in bulk for $4.25 per gallon.
ISP can process the 575 pounds of soy meal into 725 pounds of soy cookies at an additional
cost of $380. Each pound of soy cookies can be sold for $2.24 per pound. The 160 gallons of soy
oil can be packaged at a cost of $240 and made into 640 quarts of Soyola. Each quart of Soyola
can be sold for $1.35.
Required:
Byproduct
20,000a
0
a Ending inventory shown at unrealized selling price.
BI + Production – Sales = EI
0 + 8,500 – 6,500 = 2,000 pounds
Ending inventory = 2,000 pounds $10 per pound = $20,000
16-25 (20 min.) Joint costs and decision making.
Jack Bibby is a prospector in the Texas Panhandle. He has also been running a side business for
the past couple of years. Based on the popularity of shows such as “Rattlesnake Nation,” there has
been a surge of interest from professionals and amateurs to visit the northern counties of Texas to
capture snakes in the wild. Jack has set himself up as a purchaser of these captured snakes.
Jack purchases rattlesnakes in good condition from “snake hunters” for an average of $11 per
snake. Jack produces canned snake meat, cured skins, and souvenir rattles, although he views
snake meat as his primary product. At the end of the recent season, Jack Bibby evaluated his
financial results:
The cost of snakes is assigned to each product line using the relative sales value of meat, skins,
and rattles (i.e., the percentage of total sales generated by each product). Processing expenses are
directly traced to each product line. Overhead costs represent Jack’s basic living expenses. These
are allocated to each product line on the basis of processing expenses.
Jack has a philosophy of every product line paying for itself and is determined to cut his losses
on rattles.
Required:
1. Should Jack Bibby drop rattles from his product offerings? Support your answer with
computations.
2. An old miner has offered to buy every rattle “as is” for $0.60 per rattle (note: “as is” refers to
the situation where Jack only removes the rattle from the snake and no processing costs are
incurred). Assume that Jack expects to process the same number of snakes each season. Should
he sell rattles to the miner? Support your answer with computations.
SOLUTION
