Question

Harper Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 12,000 pounds of raw chicken that costs $7,000, the company produces two parts: 2,800 pounds of drumsticks and 4,200 pounds of breast for a processing cost of $2,450. The chicken breast is further processed into 3,200 pounds of steak for a processing cost of $2,000. The market price of drumsticks per pound is $1.25 and the market price per pound of chicken steak is $4.20. If Harper decided to sell chicken breast instead of chicken steak, the price per pound would be $2.20.

1. b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.

2. b-2. Calculate the gross profit for each product.

3. c-1. Should Harper further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).

4. c-2. How would the profit be affected by your answer in c-1?

Answer 1

Market value of drumsticks = 2,800*1.25 = $3,500

Market value of breasts = 4,200*2.20 = $9,240

Joint costs allocated:

Drumsticks = 9,450*3,500/12,740 = $2,596.15

Breasts = $6,853.85

b-2

Gross Profit = Sales - Cost of goods sold

Drumsticks = 3,500-2,596.15 = $903.85

Breasts = 9.240-6,853.85 = $2,386.15

c-sAdvantage of processing further = market value after processing - value before processing - processing costs

= 3,200*4.2 - 4,200*2.2 - 2,000

= $2,200

Yes, should process since advantage

c-2. Profit will increase by $2,200