Question

Breakfasttime Cereal Company manufactures two breakfast cereals in a joint process. Cost and quantity information is as follows:

  

Joint Cost			Cereal	Quantity at Split-Off Point			Sales Price per Kilogram
$	92,000		Yummies		12,200	kilograms	$	6.20
			Crummies		8,200	kilograms		7.70

Breakfasttime Cereal Company has an opportunity to process its Crummies further into a mulch for ornamental shrubs. The additional processing operation costs $1.70 per kilogram, and the mulch will sell for $11.50 per kilogram.

Required:

1-a.	Compute the net incremental revenue per kilogram if management decide to process Crummies into the mulch. (Round your answer to 2 decimal places.)

           

1-b.

Should Breakfasttime’s management decide to process Crummies into the mulch?

Yes

No

2.	Suppose the company does process Crummies into the mulch. Use the net-realizable-value method to allocate the joint production cost between the mulch and the Yummies. (Round your calculation of relative proportions to 3 decimal places.)

       

Answer 1

Solution 1:

Computation of incremental revenue per Kg if Curmmies further processed in to Mulch
Particulars	Amount
Selling price per Kg after further processing	$11.50
Less: Selling price at split off point per Kg	$7.70
Less: Further Procesing Cost per Kg	$1.70
Incremental Profit (Loss) Per Kg	$2.10

As there is net incremental revenue of $2.10, therefore Crummies should be further processed.

Solution 2:

Allocation of Joint Cost - NRV Method
Particulars	Yummies	Mulch	Total
Sale Value after further processing	$75,640.00	$94,300.00	$169,940
Further Processing Cost	$0	$13,940	$13,940
Net Realisable Value	$75,640	$80,360	$156,000
Allocation of Joint Cost Yummies - 92000*75640/156000 Mulch - 92000*80360/156000	$44,608	$47,392	$92,000