Unified Chemical Company has a joint production process that converts Zeta into
ID: 2481432 • Letter: U
Question
Unified Chemical Company has a joint production process that converts Zeta into two chemical Alpha and Beta. The company purchases Zeta for dollar 12 per pound and incurs a cost of dollar 30 per pound it into Alpha and Beta. For every 10 pounds of Zeta, the company can produce 8 pounds of Alpha and 2 pounds of Beta. The selling price for Alpha and Beta are dollar 76.50 and dollar 144.00, respectively. Unified Chemical generally processes Alpha and Beta further in separable processes to produce more re ined products. Alpha is processed separately into Alphalite at a cost of dollar 25.05 per pound. Beta is processed separately into Betalite at a cost of dollar 12 80 per pound. Alphalite and Betalite sell for dollar 105 and dollar 285 per pound, respectively. In the most recent month. Unified Chemical purchased 15,000 pounds of Zeta. The company had no beginning or ending inventory of Zeta. Allocate the joint costs to Alphalite and Betalite under the following methods: Sales value at splitoff Physical measure (pounds) Net realizable value Constant gross margin percentage NRV Unified Chemical is considering an opportunity to process Betalite further into a new product called Ultra-Betalite. The separable processing will cost dollar 85 per pound and expects an additional dollar 15 per pound packaging cost for Ultra-Betalite. The expected selling price would be dollar 360 per pound. Should Unified Chemical sell Betalite or Ultra-Betalite? What selling price for Ultra-Betalite would make Unified Chemical indifferent between selling Betalite and Ultra-Betalite? Independent of your answer to requirement (2), suppose Danny Ougard, the assistant controller, has/s completed an analysis that shows Ultra-Betalite should not be produced. Before presenting his results to top management, he received a visit from Sally Kemper. Sally had been personally responsible for developing Ultra-Betalite and was upset to learn that it would not be manufactured. Sally: The company is making a big mistake by passing up this opportunity. Ultra-Betalite will be a big seller and will get us into new markets. Danny. But the analysis shows that we would be losing money on every pound of Ultra-Betalite we manufacture. Sally: But that is a temporary problem. Eventually the cost of processing will be reduced.Explanation / Answer
Answer 1. Total Joint Costs = 15000 Pounds X ($12 (purch. Cost - Zeta) + $30 (processing Costs)) Total Joint Costs = $630000 Answer a. Sales Value at Splitoff Method Alpha Beta Total Sales Value of Total Production 918,000 432,000 1,350,000 Alpha - 12000 Pounds X $76.50 Beta - 3000 Pounds X $144 Joint Cost Allocated 428,400 201,600 630,000 Alpha - 630,000 X 918,000/1,350,000 Beta - 630,000 X 918,000/1,350,000 Answer b. Physical Maesure Method Alpha Beta Total Production in Pounds 12,000 3,000 15,000 Joint Cost Allocated 504,000 126,000 630,000 Alpha - 630,000 X 12,000/15,000 Beta - 630,000 X 3,000/15,000 Answer c. Net Relizable Value Method Alphalite Betalite Total Sales Value 1,260,000 855,000 2,115,000 Alphalite - 12000 Pounds X $105 Betalite - 3000 Pounds X $285 Less: Seperable Costs 300,600 338,400 639,000 Alphalite - 12000 Pounds X $25.05 Betalite - 3000 Pounds X $112.8 Net relizable Vale 959,400 516,600 1,476,000 Joint Cost Allocated 409,500 220,500 630,000 Alpha - 630000 X 959,400/1,476,000 Beta - 630000 X 516,600/1,476,000 Answer d. Constant gross-margin percentage NRV Method Total Sales Value 2,115,000 Less: Joint Cost (630,000) Less: Seperable Costs (639,000) Gross Margin 846,000 Gross Margin Percentage 40.00% Alpha Beta Total Sales Value 1,260,000 855,000 2,115,000 Less: Gross Margin - 40% 504,000 342,000 846,000 Total Production Costs 756,000 513,000 1,269,000 Less: Seperable Costs 300,600 338,400 639,000 Joint Cost Allocated 455,400 174,600 630,000 Answer 2. Statement of Incremental Profit Additional Revenue Betalite - 3000 Pounds x $360 1,080,000 Ultra-Betalite - 3000 Pounds X 285 855,000 225,000 Additional Cost Processing Costs - 3000 Pounds X $85 (255,000) Packaging Costs - 3000 Pounds X $15 (45,000) (300,000) Incremental Profit / (Loss) (75,000) Unified Chemical should not further processed Betalite into Ultra-Betalite as it will decrease its Net Operating Income by $75000. SP of Ultra-Betalite = $360 (Current price) + $25 ($75000/ 3000 Pounds) = $385 (Where Unified Chemical is Indifferent between sell Beralite or processed further in Ultra-Betalite)
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