3. Townson Company manufactures G and H in a joint process. The joint costs amou

Question

3. Townson Company manufactures G and H in a joint process. The joint costs amount to $80,000 per batch of finished goods. Each batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is S8.75 per liter, and the selling price of H is S15.00 per liter. Required A. If the joint costs are allocated on the basis of the products' sales value at the split-off point, what amount of joint cost will be charged to each product? Hint (Unit sales S/Total Sales) x Cost B. Townson has discovered a new process by which G can be refined into Product GG, which has a sales price of $12 per liter. This additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs, should the company use the new process? Show calculations.

Explanation / Answer

Step:1

Yields for G: 2000 * 40% = 8000

Yields for H: 20000 * 60% = 12000

Sales value at split of (G): 8000 * 8.75 = $70000

Sales value at split of (H): 12000 * 15 = $180000

Total sales value at split of = $250000

Computation of Joint cost allocation:

G: 80000 * (70000/250000) = $22400

H: 80000 * (180000/250000) = $57600

Step:2

Company should go with the project as it will be profitable.

Incremental revenue per liter (12-8.75) 3.25 Less: Incremental cost per liter 2.10 Incremental profit per liter 1.15 Total Volume (In liters) 8000 Incremental profit (8000*1.15) 9200

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