Chapter 5, Problem 3PB

Joint cost allocation

McKenzie’s Soap Sensations, Inc., produces hand soaps with three different scents: morning glory, snowflake sparkle, and sea breeze. The soap is produced through a joint production process that costs $30,000 per batch. Each batch produces 14,800 bottles of morning glory hand soap, 12,000 bottles of snowflake sparkle hand soap, and 10,000 bottles of sea breeze hand soap at the split-off point. Each product is processed further after the split-off point, but the market value of a bottle of any of the flavors at this point is estimated to be $1.25 per bottle. The additional processing costs of morning glory, snowflake sparkle, and sea breeze hand soap are 10.50, $0.55, and $0.60 per bottle, respectively. Morning glory, snowflake sparkle, and sea breeze hand soap are then sold for $2.00, $2.20, and $2.40 per bottle, respectively.

Instructions

1. 1. Using the net realizable value method, allocate the joint costs of production to each product.
2. 2. Explain why McKenzie’s Soap Sensations, Inc., always chooses to process each variety of hand soap beyond the split-off point.
3. 3. If demand for all products was the same, which product should McKenzie’s Soap Sensations, Inc., produce in the highest quantity?