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Rhone Corporation produces a product called Sharone, which gives rise to a by-product called Erone. The only costs associated with Erone are additional processing costs of $2 for each unit. Rhone accounts for Erone's sales first by deducting its separable costs from its sales and then by deducting this net amount from the cost of goods sold of Sharone. This year, 4,800 units of Erone were produced. They were all sold for $10 each. Company operating expenses were $120,000 for the year. Sales revenue and cost of goods sold for Sharone were $800,000 and $400,000, respectively, for the year. (CPA adapteD
-If Rhone changes its method of accounting for Erone's sales by showing the net amount as "other revenue,"
Rhone's gross margin would be:
A) $400,000
B) $318,400
C) $438,400
D) $361,600

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Quizplus · Accepted Answer

By showing the net amount as "other revenue," the gross margin calculation for Rhone would include the sales of Sharone and the net revenue from Erone sales. The sales of Erone are $10 * 4,800 = $48,000. The costs associated with Erone are $2 * 4,800 = $9,600. Thus, the net amount from Erone sales is $48,000 - $9,600 = $38,400. Adding this to the sales of Sharone gives us $800,000 (Sharone sales) + $38,400 (net Erone sales) = $838,400. The cost of goods sold for Sharone remains at $400,000. Therefore, the gross margin is $838,400 - $400,000 = $438,400.

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