2. Joint production decisions Grassy Fertilizer manufactures two lines of garden

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2. Joint production decisions
Grassy Fertilizer manufactures two lines of garden grade fertilizer as part of a joint production process: GF10 and GF20. Joint costs up to Grassy’s split-off point total $85,000 per batch. These joint costs are allocated to GF10 and GF20 in proportion to their relative sales values at the split-off point of $40,000 and $60,000, respectively.

(a) The $85,000 in joint costs should be allocated to each product as follows:
GF10 $____________, GF20 $____________

(b) Which product (GF10 or GF20) would result in a net decrease in operating income if processed into a commercial grade fertilizer? ____________

(c) Which product (GF10 or GF20) would result in a net increase in operating income if processed into a commercial grade fertilizer? ____________

Additiona Final selling price er Processing Costs S18,000 38,000 batch of commercial GF10 GF20 grade fertilizer S67,000 97,000

Explanation / Answer

a) The cost of $85000 shall be allocated in the ratio of sales as follows:

GF10 = $85000 * 40000/100000 = $34000

GF20 = $85000 * 60000/100000 = $51000

b) Net operating income before processing = GF10 = $40000 - $34000 = $6000

GF20 = $60000 - $51000 = $9000

Net operating income after processing

As seen from the above if further processing is done the net operating income of GF20 decreases on further processing by $1000.

c) As seen from the above if further processing is done the net operating income of GF10 increases on further processing by $6000.

Particulars GF10($) GF20($) Sales 67000 97000 Less : Allocated Joint cost as in a) above 34000 51000 Less : Additional Cost 18000 38000 Net Income 15000 8000

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