Mistical Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000. $\begin{array}{|l|c|c|c|c|}
\hline
& \mathrm{QV} 3 & \mathrm{~V} \times 7 & \text { HM4 } & \text { LZ9 }\
\text { Number of ounces per } \
\text { batch } & 100 & 80 & 125 &195\
\hline\text { Cost of further processing } & \$ 2,400 & \$ 400 & \$ 2,500 & \$ 2,800 \
\hline\text { Selling price of } \
\text { unprocessed intermediate } &\$ 62 & \$ 49 & \$ 102 & \$ 47 \
\text { product per ounce } & & & &\
\hline\text { Selling price of final } \
\text { product after further } & \$ 85 & \$ 57 & \$ 127 & \$ 61 \
\text { processing per ounce }\
\hline
\end{array}$ Required:
a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product.
b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing?
c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mistical Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mistical Herbals makes per batch.
d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value.
e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products.

Question

Mistical Herbals processes exotic plant materials into various fragrances and biological pastes used by perfume and cosmetic firms. One particular plant material, Xubonic root from the rain forest in Australia, is processed yielding four joint products: QV3, VX7, HM4, and LZ9. Each of these joint products can be sold as is after the joint production process or processed further. The following table describes the yield of each joint product from one batch, the selling prices of the intermediate and further processed products, and the costs of further processing each joint product. The joint cost of processing one batch of Xubonic root is $30,000. $\begin{array}{|l|c|c|c|c|}
\hline
& \mathrm{QV} 3 & \mathrm{~V} \times 7 & \text { HM4 } & \text { LZ9 }\
 \text { Number of ounces per } \
\text { batch } & 100 & 80 & 125 &195\
\hline\text { Cost of further processing } & \$ 2,400 & \$ 400 & \$ 2,500 & \$ 2,800 \
\hline\text { Selling price of } \
\text { unprocessed intermediate } &\$ 62 & \$ 49 & \$ 102 & \$ 47 \
\text { product per ounce } & & & &\
\hline\text { Selling price of final } \
\text { product after further } & \$ 85 & \$ 57 & \$ 127 & \$ 61 \
\text { processing per ounce }\
\hline
\end{array}$ Required:
a. Allocate the $30,000 joint cost per batch to each of the joint products based on the number of ounces in each joint product.
b. To maximize firm value, which of the joint products should be processed further and which should be sold without further processing?
c. Based on your analysis in part (b) regarding the decisions to process further or not, should Mistical Herbals process batches of Xubonic root into the four joint products? Support your decision with a quantitative analysis and indicate how much profit or loss Mistical Herbals makes per batch.
d. Suppose the joint cost of $30,000 is allocated using the net realizable value of each joint product. Calculate the profits (loss) per joint product after allocating the joint cost using net realizable value.
e. Explain how the use of joint cost allocations enhances or harms the decision to process joint products.

Quizplus · Accepted Answer

The Answer is a. Allocated joint cost is $60 per ounce ($30,000 ÷ 500 ounces):

\begin{array} { | l | r | r | r | r | r | } \hline & Q W 3 & \mathrm {~V} 7 & \mathrm { HM } 4 & \mathrm { LZ9 } & ext { Total } \\hline \begin{array} { l } ext { \% of batch by } \ ext { ounce }\end{array} & 20 \% & 16 \% & 25 \% & 39 \% & 100 \% \\hline \begin{array} { l } ext { Allocated joint } \ ext { cost }\end{array} & \$ 6,000 & \$ 4,800 & \$ 7,500 & \$ 11,700 & \$ 30,000 \\hline\end{array}

b. Decisions to process further:

\begin{array}{|l|r|r|r|r|}\hline& \mathrm{QV} 3 & \mathrm{~V} imes 7 & ext { HM4 } & ext { LZ9 }\ \hline ext { Number of ounces per } \ ext { Incremental revenue per } \ ext { ounce from further } & \$ 23 & \$ 8 & \$ 25 & \$ 14\ ext { processing }\\hline ext { Number of ounces per } \ ext { batch } & 100 & 80 & 125 & 195 \\hline ext { Incremental revenue from } \ ext { further processing }& \$ 2,300 & \$ 640 & \$ 3.125 & \$ 2.730 \\hline ext { Cost of further processing } \ ext { Decision to process further } & \$ 2.400 & \$ 400 & \$ 2.500 & \$ 2,800 \\hline ext { Decision to process further } & ext { NO } & ext { YES }& ext { YES } & ext { NO }\\hline \end{array}

c. Batches of Xubonic root should be produced because each batch yields profits of $3,200.

\begin{array}{|c|c|c|c|c|c|}\hline& \mathrm{QV} 3 & \mathrm{~V} imes 7 & ext { HM4 } & ext { LZ9 }& ext { Total }\\hline ext { Revenue from } \ ext { further } & \$ 6,200 & \$ 4,560 & \$ 15,875 & \$ 9.165 &\ ext { processing or } \ ext { immediate sale } \\hline ext { Cost of further } \ ext { processing }& 0 & 400 & \$ 2,500 & 0 & \\hline ext { Net realizable } \ ext { value } & \$ 6.200 & \$ 4.160 & \$ 13,375 & \$ 9.165 & \$ 32,900 \\hline ext { Joint cost of } \ ext { processing a } \ ext { batch }& & & & & \$ 30,000 \\hline ext { Profit per batch } & & & & & \$ 2,900 \\hline\end{array}

d. Profit after allocating joint cost using net realizable value:

\begin{array} { | l | r | r | r | r | r | } \hline & ext { QV3 } & ext { VX7 } & ext { HM4 } & ext { LZ9 } & ext { Total } \\hline ext { NRV } & \$ 6.200 & \$ 4.160 & \$ 13.375 & \$ 9.165 & \$ 32,900 \\hline ext { \$ of NRV } & 18.84 \% & 12.64 \% & 40.65 \% & 27.86 \% & 100 \% \\hline \begin{array} { l } ext { Allocated } \ ext { joint cost }\end{array} & \$ 5,653 & \$ 3.793 & \$ 12,196 & \$ 8,357 & \$ 30,000 \\hline \begin{array} { l } ext { Net income } \ ext { per batch }\end{array} & \$ 547 & \$ 367 & \$ 1.179 & \$ 808 & \$ 2,900 \\hline\end{array}

e. Joint cost allocations do not enhance the decision of whether to further process joint products or not. Joint cost allocations based on net realizable value does not harm the decision process, but it does not add anything. The decisions in part (b) to process each joint product further or sell after the split off point were made without any joint cost allocations.

Mistical Herbals Processes Exotic Plant Materials into Various Fragrances and Biological