Joint Products: Hernandez Industries manufactures shampoo. - Joint costs incurre
ID: 2461061 • Letter: J
Question
Joint Products:
Hernandez Industries manufactures shampoo.
- Joint costs incurred total $20,000 for a standard production run.
- A Standard production run generates 5,000 gallons of Everyday Shampoo and 3,400 gallons of Specialty Shampoo.
-Everyday Shampoo sells for $9/gallon and Specialty Shampoo sells for $15/gallon.
- Currently all Specialty Shampoo is further processed into 3,200 gallons of Top Dollar Shampoo that sells for $21/gallon. (Further processing, at a cost of $12,200, involves adding a top secret, special ingradient and doing some additional refinement).
You must show your calculations to receive credit.
1. How should the $20,000 of joint product costs be allocated under the Net Realizable Value Method? (Remember, Hernandez is currently producing Everyday Shampoo and Top Dollar Shampoo)
2. Based on profitability only, should Hernandez continue to convert all Specialty Shampoo into Top Dollar Shampoo? Show calculations to support your answer.
Explanation / Answer
Answer A) Based on net realised value
NRV of Everyday Shampoo = 5000*9 = 45000 and NRV of Speciality Shampoo = (3200*21) - 12200= 55000, hence cost will be allocated 45:55 between Everyday and Speciality Shampoo
For Everyday = $20000*45/100 = 9000, and for Speciality = $20000*55/100 =11500 is Answer
Answer B) NRV of converted Top dollar shampoo is $55000 as calculated above. If not converted, Speciality shamoo will fetch NRV of 3400*15 = 51000 which is low. Hence the company should continue converting.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.