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ruskin ruskin
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Posts: 664
A year ago
Purple Paper Company processes wood pulp into two products. During July the joint costs of processing were $50,000. Production and sales value information for the month were as follows:

      Sales Value at
Product   Kilograms Produced    splitoff Point   Separable Costs
Paper   125,000   $63,000   $221,000
Cardboard   96,000   46,000   262,000

Paper sells for $2.71 a kilogram and cardboard sells for $3.10 a kilogram.

There were no beginning or ending inventories for July.

Required:
1.   Determine the amounts to be allocated to each product using the:
   a.   constant gross margin percentage of NRV method
   b.   physical measure method
2.   Should management process these products beyond the splitoff point? Justify your answer. Also comment on how this decision would be affected by the results of the expected profits using the constant gross margin percentage of NRV and physical measure methods.
Textbook 

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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pachopacho
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Posts: 682
A year ago
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1. (a) Constant gross margin method joint cost allocated:
      Paper   Cardboard   Totals 
Sales   $338,750   $297,600   $636,350
Separable costs    221,000    262,000    483,000
Contribution margin   $117,750   $35,600   $153,350
Joint costs         50,000
Gross margin         $103,350
Gross margin % = $103,350/$636,350 = 16.241%

   Paper   Cardboard   Totals 
Sales   $338,750   $297,600   $636,350
Deduct gross margin   55,017   48,333   103,350
Separable costs    221,000    262,000    483,000
Joint cost allocated      $   62,733   $  (12,733)     $ 50,000


1. (b)Physical measures method joint cost allocated:
   Paper = [125,000/(125,000 + 96,000)] × $50,000 =         $ 28,281
   Cardboard = [96,000/(125,000 + 96,000)] × $50,000 =         21,719
               $ 50,000

2.   The paper product has a post splitoff CM of $117,750 which is greater than the $63,000 sales value at the splitoff point so processing should continue. The $35,600 contribution margin for the cardboard is less than the $46,000 sales value at the splitoff point so further processing will result in less profit.

Using the constant gross margin method management will decide to continue processing because both products show a gross margin of 16.241%.

Using the physical measures method the budgeted paper profit is ($117,750 - $28,281 = $89,469); and, the budgeted cardboard profit is ($35,600 - $21,719 = #13,881, so management will decide to continue processing.
This verified answer contains over 310 words.
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-Michigan State University

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