Exotic Aroma Company buys bulk flowers and processes them into perfumes in a two-stage process. Its highest-grade perfume, Seduction, and a residue that is processed into a medium-grade perfume, Romance, come from a certain mix of petals. In July, the company used 25,000 pounds of petals. The first stage is a joint process that reduces the petals to Seduction and the residue. This first stage had the following costs: - $100,000 direct materials - $200,000 conversion The additional costs of producing Romance in the second (pressing) stage were as follows: - $44,000 direct materials - $180,000 conversion For July, total production yielded 2,000 ounces of Seduction and 8,400 ounces of Romance. There was no beginning inventory on July 1, nor were there uncompleted units. Packaging costs incurred for each product as completed were $120,000 for Seduction and $308,000 for Romance. The sales price per ounce is $180 for Seduction and $70 for Romance.
Required
a. Allocate joint costs using the net realizable value method. (Packaging and additional processing costs must be subtracted from revenue to compute net realizable values.) b. Allocate the joint costs using the physical-measures method. c. Management is concerned about the large disparity in allocation amounts using the physicalmeasures method versus the NRV method. Management has asked you to explain why this discrepancy occurred. Write a memo to management explaining it. d. Assume that Exotic Aroma can sell the squeezed petals from the reduction process to greenhouses for fertilizer. In July, it sold 12,000 pounds of squeezed petals that were left over for $1.50 per pound. The squeezed petals are a by-product of reduction. Assume that the net realizable value of by-products reduces the joint costs of main products. Answer requirements (a) and (b) using this new information.