The Great Foods Company processes milk into skim milk and butter. This year 70,000 litres of milk will be processed, costing $40,000. If processed to the split-off point, this will yield 40,000 litres of skim milk and 10,000 kilograms of butter. Skim milk is sold to distributors for $1 per litre and butter is sold for $0.75 per kilogram. Great Foods has the option of processing the two products further. Skim milk can be processed into canned, sweetened and condensed skim milk and sold for $0.80 per can. One litre of skim milk makes 2 cans of condensed milk. To process 40,000 litres of skim milk it will cost $18,000. Butter can be processed into cake frosting and sold in containers for $2 each. One kilogram of butter goes into each container of frosting. The cost of processing 10,000 kilograms of butter into frosting costs $15,000.
What is the per-unit joint cost allocated to condensed milk and frosting if the sales value at split-off method is used?

Question

Quizplus · Accepted Answer

The sales value at split-off method allocates joint costs based on the estimated sales value of each product at the split-off point. At the split-off point, the total sales value of skim milk and butter is:
(40,000 litres x $1/litre) + (10,000 kg x $0.75/kg) = $50,000
The cost of processing skim milk into condensed milk is $18,000 for 40,000 litres, which would make 80,000 cans of condensed milk. Therefore, the additional cost per can is:
$18,000/80,000 cans = $0.225/can
The sales value of 40,000 litres of skim milk processed into condensed milk is:
40,000 litres x 2 cans/litre x $0.80/can = $64,000
The total sales value of skim milk and condensed milk is:
$50,000 + $64,000 = $114,000
Allocating the joint costs based on the sales value of each product, the cost per unit of condensed milk is:
($114,000 / 80,000 cans) + $0.225/can = $0.375/can + $0.225/can = $0.60/can
The cost per container of frosting is calculated in the same way. The cost of processing 10,000 kg of butter into frosting is $15,000, which would make 10,000 containers of frosting. Therefore, the additional cost per container is:
$15,000/10,000 containers = $1.50/container
The sales value of 10,000 kg of butter processed into frosting is:
10,000 kg x $2/kg/container = $20,000
The total sales value of butter and frosting is:
$50,000 + $20,000 = $70,000
Allocating the joint costs based on the sales value of each product, the cost per unit of frosting is:
($70,000 / 10,000 containers) + $1.50/container = $7/container + $1.50/container = $2.50/container
Therefore, the per-unit joint cost allocated to condensed milk and frosting is $0.60/can and $2.50/container, respectively. Hence, option B is the correct answer.

Regarding the best choice, it depends on the company's goals and profitability. At the split-off point, the company could sell the skim milk and butter and make a profit of $50,000. Processing the skim milk and butter into condensed milk and frosting would generate additional profits of $64,000 and $5,000, respectively. However, the additional processing costs would be $33,000 ($18,000 for condensed milk and $15,000 for frosting). Therefore, the net profit from processing would be $36,000 ($64,000 + $5,000 - $33,000). The company should choose to process the skim milk into condensed milk because it has a higher profit margin ($0.375/can) than the butter processed into frosting ($0.25/container). However, the company should consider whether or not the additional processing costs are worth the extra profit.

The Great Foods Company Processes Milk into Skim Milk and Butter