Question

Newcastle​ Sawmill, Inc.,​(N​SI), purchases logs from independent timber contractors and processes the logs into three types

• Studs for residential buildings (walls, ceilings)
• Decorative pieces (fireplace mantels, beams for cathedral ceilings)
• Posts used as support braces (mine support braces, braces for exterior fences on ranch properties)

of lumber products. These products are the result of a joint sawmill process that involves removal of bark from the​ logs, cutting the logs into a workable size​ (ranging from 8 to 16 feet in​ length), and then cutting the individual products from the logs.

The joint process results in the following costs of products for a typical month:

Direct materials (rough timber logs) 505,000

Debarking (labor and overhead) 45,000

Sizing (labor and overhead) 210,000

Product cutting (labor and overhead) 240,000

Total joint costs $ 1,000,000

Product yields and average sales values on a​ per-unit basis from the joint process are as​ follows:

	Monthly Output of Materials			Fully Processed
Product	at Splitoff Point			Selling Price
Studs		70,000	units		$9
Decorative pieces		4,000	units		$110
Posts		24,000	units		$24

The studs are sold as rough­cut lumber after emerging from the sawmill operation without further processing by NSI. Also, the posts require no further processing beyond the splitoff point. The decorative pieces must be planed and further sized after emerging from the sawmill. This additional processing costs $130,000 per month and normally results in a loss of 10% of the units entering the process. Without this planing and sizing process, there is still an active intermediate market for the unfinished decorative pieces in which the selling price averages $55 per unit.

Requirement

1.Based on the information given for Newcastle Sawmill, allocate the joint processing costs of $1,000,000 to the three products using:

a.Sales value at splitoff method

b.Physical­measure method (volume in units)

c.NRV method

2. Prepare an analysis for Newcastle Sawmill that compares processing the decorative pieces further, as it currently does, with selling them as a rough­cut product immediately at splitoff.

3. Assume Newcastle Sawmill announced that in six months it will sell the unfinished decorative pieces at splitoff due to increasing competitive pressure. Select three types of likely behavior that will be demonstrated by the skilled labor in the planing­and­sizing process as a result of this announcement. How could this behavior be influenced by management?

Answer 1