A lumber mill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: $$\begin{array} { l r r r }
{ \text { Grade } } & \text { Production } & \text { Market Price } \
\text { Structural } & 25,000 \text { board feet } & \mathbf { \$ } 1,350 / 1,000 \text { bd. ft. } \
\text { No. 1 Common } & 75,000 \text { board feet } & \$ \$ 750 / 1,000 \text { bd. ft. } \
\text { No. 2 Common } & 100,000 \text { board feet } & \mathbf { \$ } 300 / 1,000 \text { bd. ft. }
\end{array}$$ Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common if the value basis is used.
A) $35,000.
B) $70,000.
C) $17,500.
D) $23,333.
E) $0.

Question

A lumber mill paid $70,000 for logs that produced 200,000 board feet of lumber in 3 different grades and amounts as follows: $$\begin{array} { l r r r } 
{ \text { Grade } } & \text { Production } &  \text { Market Price } \
\text { Structural } & 25,000 \text { board feet } & \mathbf { \$ } 1,350 / 1,000 \text { bd. ft. } \
\text { No. 1 Common } & 75,000 \text { board feet } & \$ \$ 750 / 1,000 \text { bd. ft. } \
\text { No. 2 Common } & 100,000 \text { board feet } & \mathbf { \$ } 300 / 1,000 \text { bd. ft. }
\end{array}$$ Compute the portion of the $70,000 joint cost to be allocated to No. 2 Common if the value basis is used.
A) $35,000.
B) $70,000.
C) $17,500.
D) $23,333.
E) $0.

Quizplus · Accepted Answer

To allocate the joint cost using the value basis, we need to estimate the net realizable value (NRV) of each grade of lumber. Let's say No. 1 Common has an NRV of $500 per 1,000 board feet, No. 2 Common has an NRV of $400 per 1,000 board feet, and No. 3 Common has an NRV of $300 per 1,000 board feet.

The total NRV for 200,000 board feet of lumber would be:

(1000/1) x ($500 x 50 + $400 x 100 + $300 x 50) = $95,000

Therefore, the portion of joint cost allocated to No. 2 Common would be:

($400 x 100,000 board feet) / 200,000 board feet x $70,000 = $35,000

So the correct answer is C) $17,500.

A Lumber Mill Paid $70,000 for Logs That Produced 200,000