Question

Prescott Lumber processes logs into grade A and grade B lumber. Logs cost $18,200 per load. The milling process produces 5,000 units of grade A with a market value of $86,800, and 20,000 units of grade B with a market value of $12,400. The cost of the milling process is $17,000 per load.

Required:

a. If the costs of the logs and the milling process are allocated on the basis of units of output, what cost will be assigned to each product? (Do not round intermediate calculations.)

b. If the costs of the logs and the milling process are allocated on the basis of the net realizable value, what cost will be assigned to each product? (Do not round intermediate calculations.)

c-1. How much profit or loss does the grade B lumber provide using the data in this problem and your analysis in requirement (a)? (Do not round intermediate calculations.)

Answer 1

a	Allocation on the basis of units of output
		Grade A	Grade B	Total
	Units produced	5000 units	20000 units	25000 units
	Allocation of Logs cost	$3,640	$14,560	$18,200
	Allocation of Milling process	$3,400	$13,600	$17,000
	Total cost allocated	$7,040	$28,160	$35,200
b	Allocation on the basis of units of Net realizable value
		Grade A	Grade B	Total
	Net realizable value	$86,800	$12,400	$99,200
	Allocation of Logs cost	$15,925	$2,275	$18,200
	Allocation of Milling process	$14,875	$2,125	$17,000
	Total cost allocated	$30,800	$4,400	$35,200
c	Net realizable value of Grade B	$12,400
	Less:Cost allocated to Grade B in a	$28,160
	Loss	-$15,760