A firm incurs manufacturing costs totalling $240 000 in process 1 to produce the following three beverages emerging from that process at the split-off point:
Apple juice: sold immediately it emerges from Process 1 without further processing for $0.70 litre
Apple cider: processed further in Process 2 at an additional cost of $0.66667 litre,then sold for $1.50 litre
Apple pulp: processed further in Process 3 at an additional cost of $1.50 litre,then sold for $3.50 litre
The following data relates to the period in which the joint costs were incurred.What is the amount of joint cost that would be allocated to apple juice if the constant gross margin method had been used?

Question

Quizplus · Accepted Answer

The constant gross margin method allocates joint costs based on the relative profit margins of each product. First, we need to calculate the profit margins of each product:

- Apple juice: sold for $0.70 litre, no further processing cost, profit margin = $0.70 litre
- Apple cider: processed further at a cost of $0.66667 litre, sold for $1.50 litre, profit margin = $0.83333 litre
- Apple pulp: processed further at a cost of $1.50 litre, sold for $3.50 litre, profit margin = $2.00 litre

The total profit margin for all three products is $3.50 - ($0.70 + $0.83333) = $1.96667 litre. To allocate the joint costs, we need to determine what portion of the total profit margin each product contributes:

- Apple juice: $0.70 / $1.96667 = 0.356
- Apple cider: $0.83333 / $1.96667 = 0.423
- Apple pulp: $2.00 / $1.96667 = 1.017

These percentages represent the relative value added by each product, and can be used to allocate the joint costs. To find the joint cost allocated to apple juice, we multiply the total joint costs by its percentage:

- Joint cost allocated to apple juice = $240,000 x 0.356 = $85,440

This is closest to choice B, $91,000.

A Firm Incurs Manufacturing Costs Totalling $240 000 in Process