4. Lake Corporation manufactures two products, AA and BB, from a joint process.
ID: 2528849 • Letter: 4
Question
4. Lake Corporation manufactures two products, AA and BB, from a joint process. A production run costs $20,000 and results in 500 units of AA and 2,000 units of BB. Both products must be processed past the split-off point, incurring separable costs of $5 per unit for AA and $10 per unit for BB. The market price is $25 for AA and $20 for BB.
I have the answers I just need the work shown in detail with step-by-step instructions.
Required:
a.
Allocate joint production costs to each product using the physical units method. (Ans:AA=$4,000; BB=$16,000)
b.
Allocate joint production costs to each product using the net realizable value method. (Ans: AA=$6,667; BB=$13,333)
c.
Allocate joint production costs to each product using the constant gross margin percentage method. (Ans: AA=$7,619.05; BB=$12,380.96)
a.
Allocate joint production costs to each product using the physical units method. (Ans:AA=$4,000; BB=$16,000)
b.
Allocate joint production costs to each product using the net realizable value method. (Ans: AA=$6,667; BB=$13,333)
c.
Allocate joint production costs to each product using the constant gross margin percentage method. (Ans: AA=$7,619.05; BB=$12,380.96)
Explanation / Answer
Lake Corporation
Joint costs = $20,000
Product
Physical units
Proportion
Allocated joint costs
AA
500
20%
$4,000
BB
2,000
80%
$16,000
Computations –
Total physical units of both products = 500 + 2,000 = 2,500 units
Proportion of AA = 500/2,500 = 20%
Proportion of BB = 2,000/2,500 = 80%
Joint cost allocation is as follows,
AA = $20,000 x 20% = $4,000
BB = $20,000 x 80% = $16,000
Net realizable value = sales – separation costs
For Product AA –
Sales price of AA = $25
Sales = $25 x 500 = $12,500
Separation costs at $5 = 500 x $5 = $2,500
Net realizable value = $12,500 - $2,500 = $10,000
For Product BB –
Sales price of BB = $20
Sales = $20 x 2,000 = $40,000
Separation costs at $10 = 2,000 x $10 = $20,000
Net realizable value = $40,000 - $20,000 = $20,000
Product
Net Realizable Value
Proportion
Allocated Joint Costs
AA
$10,000
33.33%
$6,667
BB
20,000
66.67%
$13,333
Total
$30,000
$20,000
Allocated joint costs –
For Product AA:
Proportion = 10,000/30,000 = 33.33%
Joint cost allocation = $20,000 x 33.33% = $6,667
For Product BB:
Proportion = 20,000/30,000 = 66.67%
Joint cost allocation = $20,000 x 66.67% = $13,333
Gross margin percentage = gross margin/sales
Gross margin = sales – cost of goods sold
Sales = sales of AA + Sales of BB
= (500 x $25) + (2,000 x $20) = $52,500
Cost of goods sold = cost of goods sold of AA + cost of goods sold BB
COGS = $20,000 + (500 x $5) + (2,000 x $10) = $42,500
Gross margin = $52,500 - $42,500 = $10,000
Grand gross margin percentage = (total revenue – total costs)/total revenue
= ($52,500 -$42,500)/$52,500 = 19.05%
Joint product gross margin = market price x grand gross margin
Joint cost allocated to product = market value – gross margin – separable costs
Gross margin for each product = sales revenue x gross margin percentage
Product AA –
= $12,500 – (12,500 x 19.05%) - $2,500 = $7,619
Product BB –
= $40,000 – (40,000 x 19.05%) - $20,000 = $12,381
Product
Physical units
Proportion
Allocated joint costs
AA
500
20%
$4,000
BB
2,000
80%
$16,000
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