Chapter 17, Problem 32P

Lafayette Company manufactures two products out of a joint process: Compod and Ultrasene. The joint costs incurred are $250,000 for a standard production run that generates 120,000 gallons of Compod and 80,000 gallons of Ultrasene. Compod sells for $2.00 per gallon while Ultrasene sells for $3.25 per gallon.

Required:

1. 1. If there are no additional processing costs incurred after the split-off point, calculate the amount of joint cost of each production run allocated to Compod on a physical-units basis.
2. 2. If there are no additional processing costs incurred after the split-off point, calculate the amount of joint cost of each production run allocated to Ultrasene on a relative-sales-value basis.
3. 3. Suppose the following additional processing costs are required beyond the split-off point in order to obtain Compod and Ultrasene: $.10 per gallon for Compod and $1.10 per gallon for Ultrasene.
   1. a.      Calculate the amount of joint cost of each production run allocated to Ultrasene on a physical-units basis.
   2. b.      Calculate the amount of joint cost of each production run allocated to Compod on a net-realizable-value basis.
4. 4. Assuming the same data as in requirement (3), suppose Compod can be processed further into a product called Compodalene, at an additional cost of $.40 per gallon. Compodalene will be sold for $2.60 per gallon by independent distributors. The distributors’ commission will be 10% of the sales price. Should Lafayette sell Compod or Compodalene?
5. 5. Independent of your answer to requirement (4), suppose Christine Dalton, the assistant controller, has completed an analysis showing that Compod should not be processed further into Compodalene. Before presenting her analysis to top management, however, she got a visit from Jack Turner, Lafayette’s director of research. Turner was upset upon learning that Compodalene, a product he had personally developed, would not be manufactured.

Turner: “The company’s making a big mistake if it passes up this opportunity. Compodalene will be a big seller and get us into new markets.”

Dalton: “But the analysis shows that we’d be losing money on every gallon of Compod that we process further.”

Turner: “I know, Christine, but that’s a temporary problem. Eventually, we’ll bring down the cost of making Compodalene.”

Dalton: “Can you find me some estimates on the cost reduction you expect?”

Turner: “I don’t have a crystal ball, Christine. Look, if you could just fudge the numbers a little bit to help me get approval to produce some Compodalene, I can get this product off the ground. I know the cost reduction will come.”

Comment on the ethical issues in this scenario. What should Christine Dalton do?

1. 6. Assume the same data as given in requirements (3) and (4). The industrial chemical industry has experienced a downturn, which has left Lafayette with idle capacity. Suppose Lafayette can sell only half of the Compod made in each production run, but the remainder could be sold as Compodalene. Should Lafayette process the remaining Compod into Compodalene?

To determine

Ascertain the amount of each joint cost production allocated to Product C using the physical-units method; assume that there are no additional processing costs after the split-off point.

Explanation of Solution

Joint costs: The total costs incurred prior to the split-off point, where the joint products are identified as individual products, are called joint costs.

Ascertain the amount of each joint cost production allocated to Product C, using the physical-units method as follows:

Joint Cost (a)	Joint Products	Quantity at Split-Off Point	Proportion (b)	Allocation of Joint Cost $\left(\text{a}\times \text{b}\right)$
$250,000	Product C	120,000 gallons	60%	$ 150,000
$250,000	Product U	80,000 gallons	40%	$100,000
	Total	200,000		$250,000

Table (1)

Note: The relative proportions are calculated by dividing the quantity at Split-Off Point with its total $\left(\frac{\text{120,000}}{\text{200,000}}\right)$.

Conclusion

Therefore, the joint cost allocated to Product C is $150,000.

To determine

Ascertain the amount of joint cost allocated to Product U using the relative-sales-value method; assume that there are no additional processing costs after the split-off point.

Explanation of Solution

Ascertain the amount of joint cost allocated to Product U using the relative-sales-value method as follows:

Joint Cost (a)	Joint Products	Sales value at Split-Off Point (1)	Proportion (b)	Allocation of Joint Cost $\left(\text{a}\times \text{b}\right)$
$250,000	Product C	$240,000 gallons	48%	$ 120,000
$250,000	Product U	$260,000 gallons	52%	$130,000
	Total	500,000		$250,000

Table (2)

Working note (1):

Compute the sales value at Split-Off Point:

Joint Products	Quantity at Split-Off Point (a)	Sales value per gallon (b)	Sales value at Split-Off Point $\left(\text{a}\times \text{b}\right)$
Product C	120,000 gallons	$2	$240,000
Product U	80,000 gallons	$3.25	$260,000
Total	200,000		$500,000

Table (3)

Note: The relative proportions are calculated by dividing the sale values at Split-Off Point with its total $\left(\frac{\text{240,000}}{\text{500,000}}\right)$.

Conclusion

Therefore, the joint cost allocated to Product U is $130,000.

To determine

Ascertain the amount of joint cost for the following:

1. a. Allocated to Product U on a physical units basis.
2. b. Allocated to Product C on a net- realizable-value basis.

Explanation of Solution

1. a. Ascertain the amount of each joint cost production allocated to Product U using the physical-units method; assume that now there is an additional processing cost beyond the split-off point:

Joint Cost (a)	Joint Products	Quantity at Split-Off Point	Proportion (b)	Allocation of Joint Cost $\left(\text{a}\times \text{b}\right)$
$250,000	Product C	120,000 gallons	60%	$ 150,000
$250,000	Product U	80,000 gallons	40%	$100,000
	Total	200,000		$250,000

Table (4)

Under physical-units method of allocation, the additional processing costs have no effect. Therefore the joint cost allocated to Product U is $100,000.

1. b. Ascertain the amount of joint cost allocated to Product C using the net-realizable-value method; assume that now there is an additional processing cost beyond the split-off point.

Joint Cost (a)	Joint Products	Sales value of final Product(b) (1)	Separable Cost of Processing (c) (2)	Net Realizable Value $\left(\text{d}=\text{b}-\text{c}\right)$	Proportion (e)	Allocation of Joint Cost$\left(\text{d}\times \text{e}\right)$
$250,000	Product C	$240,000	$12,000	$228,000	57%	$142,500
$250,000	Product U	$260,000	88,000	$172,000	43%	$107,500
	Total	$500,000	100,000	$400,000		$250,000

Table (5)

Working note (2):

Compute the separable Cost of Processing:

Quantity at Split-Off Point (a)	cost per unit (b)	Sales value of final Product $\left(\text{c}=\text{a}\times \text{b}\right)$
120,000 gallons	$0.10	$12,000
80,000 gallons	$1.10	88,000
200,000		100,000

Table (6)

Therefore, the joint cost of Product C under the net-realizable-value is $142,500.

Note: The relative proportions are calculated by dividing the net realizable value with its total $\left(\frac{\text{228,000}}{\text{400,000}}\right)$.

To determine

Describe whether the company should process and sell Product C into Product C.L.

Explanation of Solution

Compute the incremental revenue or loss:

Particulars	Amounts in ($)	Amounts in ($)
Incremental revenue:
sales per unit of Product CL	$ 2.60
Less: sales per unit of Product C	$ 2.00	$ 0.60
Incremental cost :
Processing cost	$ 0.40
Add: Sales commission $\left(\$2.60\times 10\%\right)$	.26	.66
Incremental loss incurred per gallon when further processing		$ -0.06

Table (7)

From the above explanation it is clear that the company should not process product C into CL and it should sell only product C.

To determine

State the ethical issues for the given situation and indicate whether the controller should change the analysis made.

Explanation of Solution

In this case, the research director is not happy with the controller’s analysis and insists the assistant controller to alter the analysis in favor of producing Product CL. The research director believes that processing product C further would result the Company in its best interests. But the assistant controller claimed that the analysis shows that if the company further process product C, it would lose money on every gallon. Therefore, for making the final decision, the research director should try to reduce the projected cost and the potential impact on the company’s market and the research director could present the altered estimates to either the assistant controller, or directly to the managers.

However, the assistant controller should not alter the analysis to support the production of product C.L and it is an unethical act.  If there is any further information missing, then the assistant controller should recommend against the further processing of product C.

To determine

Describe whether company L should process the remaining product of C into C.L

Explanation of Solution

It is better to sell Product C than to sell Product C.L. However, it is also preferable to sell Product C.L than to sell nothing. Because, each gallon of Product C.L makes a positive contribution toward covering the joint production cost, fixed costs, and profit.

Workings:

Particulars	Amounts in ($)	Amounts in ($)
Incremental revenue:
sales value of Product CL (if there is no alternative sale)		2.6
Less: Incremental cost (if the alternative is to stop production at the split-off point):
Separable processing to produce Product C after the split-off point	0.1
Further processing cost	.40
Sales commission	.26	.76
Contribution to the joint production cost, fixed costs, and profit		1.84

Table (8)