Arkansas Corporation manufactures liquid chemicals A and B from a joint process.

Question

Arkansas Corporation manufactures liquid chemicals A and B from a joint process. It allocates joint costs orn the basis of sales value at split-off. Processing 5,000 gallons of product A and 1,000 gallons of product B to the split-off point costs $5,600. The sales value at split-off is $2 per gallon for product A and $30 per gallon for product B. Product B requires an additional separable process beyond split-off at a cost of $2.50 per gallon before it can be sold. Required: What is the company's cost to produce 1,000 gallons of product B? Product cost

Explanation / Answer

Cost to produce product B = Common cost allocated to B + Additional cost

= [5,600 × 1,000 × $30 / (5,000 × $2 + 1,000 × $30)] + ($2.50 × 1,000)

= $4,200 + $2,500

= $6,700

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