Figure 6-5
Eden Company manufactures two products, Brights and Dulls, from a joint process. A production run costs £50,000 and results in 250 units of Brights and 1,000 units of Dulls. Both products must be processed past the split-off point, incurring separable costs for Brights of £60 per unit and £40 per unit for Dulls. The market price is £250 for Brights and £200 for Dulls.
-Refer to Figure 6-5. What is the amount of joint costs allocated to Dulls using the constant gross margin percentage method?

Question

Quizplus · Accepted Answer

The constant gross margin percentage method allocates joint costs based on the gross margin percentage of each product. First, we need to calculate the total sales value of the two products:

Total sales value = (250 x £250) + (1000 x £200) = £550,000

Next, we need to calculate the gross margin for each product:

Gross margin for Brights = (£250 - £60) = £190
Gross margin for Dulls = (£200 - £40) = £160

Then, we can calculate the gross margin percentage for each product:

Gross margin percentage for Brights = £190 / £250 = 0.76 or 76%
Gross margin percentage for Dulls = £160 / £200 = 0.80 or 80%

Using the constant gross margin percentage method, we allocate joint costs based on the proportion of gross margin for each product. Therefore, the amount of joint costs allocated to Dulls is:

Joint costs allocated to Dulls = £50,000 x (80% / (76% + 80%)) = £40,000

Therefore, the best choice is B, £40,000 allocated to Dulls using the constant gross margin percentage method.

Figure 6-5 Eden Company Manufactures Two Products, Brights and Dulls, from a from a Joint