A Pharmaceutical Company purchase a raw material, which is then processed to yield three chemicals : Anarol, Estyl and Betryl. In October, 2018 the pharmaceutical company purchased 10,000 gallons of the raw material at a cost of $ 12,50,000 and company incurred additional joint conversion costs of $ 7,50,000. October, 2018 sales and production information are as follows: Gallons Price at split produced off (per Gallon) cost per Gallon 2,000 $350 3,000 $240 5,000 $200 Further processing Eventual Sales Price Anarol Estyl Betryl $30 $360 Anarol and Estyl are sold to other pharmaceutical companies at the split off point. Betryl can be sold at the split-off point or processed further and packaged for sale as an asthma medication. Required: (1) Allocate the Joint cost to three products using the physical units method, the sales-value at split-off method and the net realizable value method. (1I) Suppose that half of October, 2018 production of Estyl could be purified and mixed with all of the Anarol to produce a veterinary grade anaesthetic. All further processing costs amount to $ 2,25,000. The selling price of the veterinary grade Anarol is $ 650 per gallon. Should the pharmaceutical company further process the anarol into anesthetic ? Assume, the resultant quantity of Veterinary grade anarol produced is 2,000 gallons only.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
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