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 constant gross margin net realizable value method is used?

Question

Quizplus · Accepted Answer

The constant gross margin net realizable value method allocates joint costs based on the gross margin percentage of each product. The gross margin percentage is calculated as the difference between the net realizable value and the processing cost, divided by the net realizable value.For condensed milk, the net realizable value is $0.80 per can, and the processing cost is $18,000 / 40,000 litres = $0.45 per litre. Therefore, the gross margin percentage is ($0.80 - $0.45) / $0.80 = 43.75%.For frosting, the net realizable value is $2 per container, and the processing cost is $15,000 / 10,000 kilograms = $1.50 per kilogram. Therefore, the gross margin percentage is ($2 - $1.50) / $2 = 25%.The per-unit joint cost allocated to condensed milk is $40,000 x 43.75% / 40,000 litres = $1.470248 per can. The per-unit joint cost allocated to frosting is $40,000 x 25% / 10,000 kilograms = $0.2381 per container.

The Great Foods Company Processes Milk into Skim Milk and Butter