Question: Comparison of alternative joint-cost-allocation methods, further-processing decision, chocolate products. The Rich and Creamy Edibles Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products: chocolate-powder liquor base and milk-chocolate liquor base. These two intermediate products become separately identifiable at a single splitoff point. Every 600 pounds of cocoa beans yields 20 gallons of chocolate-powder liquor base and 60 gallons of milk-chocolate liquor base. The chocolate-powder liquor base is further processed into chocolate powder. Every 20 gallons of chocolate-powder liquor base yield 680 pounds of chocolate powder. The milk-chocolate liquor base is further processed into milk chocolate. Every 60 gallons of milk-chocolate liquor base yield 1,100 pounds of milk chocolate. Production and sales data for August 2017 are as follows (assume no beginning inventory):
¦ Cocoa beans processed, 27,600 pounds
¦ Costs of processing cocoa beans to splitoff point (including purchase of beans), $70,000
Production Sales Selling Price Separable Processing Costs
Chocolate powder 31,280 pounds 6,800 pounds $8 per pound $46,035
Milk chocolate 50,600 pounds 14,400 pounds $9 per pound $55,085
Rich and Creamy Edibles Factory fully processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In August 2017, Rich and Creamy Edibles Factory could have sold the chocolate-powder liquor base for $21 a gallon and the milk-chocolate liquor base for $28 a gallon.
1. Calculate how the joint costs of $70,000 would be allocated between chocolate powder and milk chocolate under the following methods:
a. Sales value at splitoff
b. Physical measure (gallons)
c. NRV
d. Constant gross-margin percentage NRV
2. What are the gross-margin percentages of chocolate powder and milk chocolate under each of the methods in requirement 1?
3. Could Rich and Creamy Edibles Factory have increased its operating income by a change in its decision to fully process both of its intermediate products? Show your computations.