Problem:
The Dairy Company produces three products from a joint processes using whole milk: butter, cheese, and cream. The joint costs amount to $24,000 per batch of output. Each batch totals 50,000 liters: 25% butter, 25% cheese, 50% cream. All products are processed further without gain or loss in volume. Separable costs are butter, $0.50 per liter; cheese, $2.00 per liter; cream, $0.25 per liter. The selling prices per liter are respectively: $3.50, $6.00, $4.00.
Required:
1. How much joint cost per batch should be allocated to cream, assuming that joint costs are allocated on a physical measure basis?
2. If joint costs are assigned on a net realizable value basis, how much joint cost should be allocated to cheese?
An organic grocer has offered to buy all of the cheese produced at $5.50 per liter. Traditionally 90% of the cheese production is sold. How much better or worse off financially is the company from accepting this offer?