Carson Wood Products processes logs into four grades of lumber totaling 500,000 board feet as follows at a joint cost of $300,000: What amount of joint costs will be allocated to No. 2 common using the constant gross margin percentage method?

Question

Carson Wood Products processes logs into four grades of lumber totaling 500,000 board feet as follows at a joint cost of $300,000:  What amount of joint costs will be allocated to No. 2 common using the constant gross margin percentage method?

Quizplus · Accepted Answer

Under the constant gross margin percentage method, the joint costs are allocated in proportion to the gross margin generated by each product grade. The gross margin for each grade is calculated as the sales value minus the separable costs. Since there is no information given about sales value or separable costs, assume that the gross margin percentages are as follows:
No. 1 common: 35%
No. 2 common: 20%
No. 3 common: 15%
No. 4 common: 10%

The total gross margin percentage for all grades combined is 80% (35% + 20% + 15% + 10%). Therefore, the joint costs allocated to No. 2 common are:

Joint costs x Gross margin percentage for No. 2 common / Total gross margin percentage
= $300,000 x 20% / 80%
= $75,000

However, this is not the answer given in the options. The question asks for the amount of joint costs allocated to No. 2 common, not the net income generated by it. To get to the answer, subtract the separable costs of No. 2 common, which are unknown in this question. If we assume that the separable costs of all grades are equal, then they can be calculated as follows:

Separable costs per board foot = Joint costs / Total board feet
= $300,000 / 500,000
= $0.60

The separable costs of No. 2 common are then:

No. 2 common separable costs = 0.60 x volume of No. 2 common
= 0.60 x (500,000 x 20%)
= $60,000

Therefore, the joint costs allocated to No. 2 common using the constant gross margin percentage method are:

Joint costs - No. 2 common separable costs = $300,000 - $60,000
= $240,000

This is not one of the answer choices, but the closest one is B, which is the amount of gross margin generated by No. 2 common using the assumed gross margin percentages.

Carson Wood Products Processes Logs into Four Grades of Lumber