Answered: The RieppelSpirits Company produces two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The RieppelSpirits Company produces two products—methanol (wood alcohol) and turpentine—by a joint process. Joint costs amount to $120,000 per batch of output. Each batch totals 10,000 gallons: 25% methanol and 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol, $3 per gallon, and turpentine, $2 per gallon. Methanol sells for $21 per gallon. Turpentine sells for $14 per gallon.

Read the requirements1.

Requirement 1. How much of the joint costs per batch will be allocated to methanol and to turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff point? (Round the weights to five decimal places.)

	Methanol	Turpentine	Total
Physical measure of total production
Weighting
Joint costs allocated

Requirement 2. If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to methanol and to turpentine? (Round the weights to five decimal places.)

	Methanol	Turpentine	Total
Final sales value of total production
Deduct separable costs
NRV at splitoff point
Weighting
Joint costs allocated

Requirement 3. Prepare product-line income statements per batch for requirement 1 and 2. Assume no beginning or ending inventories. (For entries with a $0 balance, make sure to enter "0" in the appropriate column.)

Begin with the physical-measure method.

	Methanol	Turpentine	Total
Revenue
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Now show the operating income for both products using the NRV method.

	Methanol	Turpentine	Total
Revenue
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Requirement 4. The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be $60 a gallon. Additional processing would increase separable costs $9 per gallon (in addition to the $3 per gallon separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.

Begin by calculating the joint cost applicable to the wood alcohol (using the NRV method). (Round the weights to five decimal places.)

	Alcohol Bev.	Turpentine	Total
Final sales value of total production
Deduct separable costs
NRV at splitoff point
Weighting
Joint costs allocated

To help you to determine if the company should produce the alcoholic beverage, complete the following table.

Incremental revenues
Incremental costs:
Added processing
Taxes
Incremental operating income (loss) from further processing

The company (1) produce the alcoholic beverage, because there is an (2) from further processing.

1: Requirements

1.	How much of the joint costs per batch will be allocated to methanol and to turpentine, assuming that joint costs are allocated based on the number of gallons at splitoff point?
2.	If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to methanol and to turpentine?
3.	Prepare product-line income statements per batch for requirement 1 and 2. Assume no beginning or ending inventories.
4.	The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be $60 a gallon. Additional processing would increase separable costs $9 per gallon (in addition to the $3 per gallon separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.

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