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Major Foods, Inc. produces a cereal from oat grain. The company buys unprocessed oats for $400 per ton. It costs $60 per ton to send the oats through a processor, which produces 1,900 pounds of pure oats and 100 pounds of oat shells. The oat shells are ground and packaged at a cost of $100 per hundred pounds. They are sold to a poultry feed company for $3 per pound. The pure oats are cooked and packaged into 4-pound containers at a cost of $350. The packaged oats are sold for $2 per 4-pound container.
-If Major uses the net realizable value method, the gross profit from the oat shells is
A) $185
B) $200
C) $85
D) $215

Question

Quizplus · Accepted Answer

The cost to process 100 pounds of oat shells is $100, and they are sold for $3 per pound, generating $300 in revenue. The gross profit is $300 - $100 = $200. However, the net realizable value method allocates joint costs based on the relative sales value, so the gross profit is $85 after considering the allocation of joint costs.

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