Question

Townson Company manufactures G and H in a join process. The joint costs amount to $80,000 per batch of finished goods. Each batch yields 20,000 liters, of which 40% are G and 60% are H. The selling price of G is $8.76 per liter, and the selling price of H is $15.00 per liter.

Required:

A. If the joint costs are allocated on the basis of the products' sales value at the split-off point, what amount of joint cost will be charged to each product? Hint (Unit sales $/Total Sales) x Cost

B. Townson has discovered a new process by which G can be refined into Product GG, which has a sales price of $12 per liter. This additional processing would increase costs by $2.10 per liter. Assuming there are no other changes in costs, should the company use the new process? Show calculation

Answer 1

Solution A:

Allocation of Joint Cost - Sale Value at Split off Point
Particulars	Product G	Product H	Total
Output at split off point	8000	12000
Selling price at split off	$8.76	$15.00
Sale Value at split off	$70,080	$180,000	$250,080
Allocation of Joint Cost	$22,418	$57,582	$80,000

Solution B:

Computation of Income (Loss) on further processing of G
Particulars	Amount
Sale Value after further processing	$96,000.00
Sale value at split off point	$70,080.00
Incremental revenue on further processing	$25,920.00
Further processing cost	$16,800.00
Incremental income (Loss) from further processing	$9,120.00

As there is incremental benefits from further processing, therefore product G should be further processed in product GG.