Joint-cost allocation. Clover Dairy Products Corp. buys one input, full-cream milk, and refines it in a churning process. From each gallon of milk Clover produces three cups of butter and nine cups of buttermilk. During May 2014, Clover bought 12,000 gallons of milk for $44,500. Clover spent another $18,860 on the churning process to separate the milk into butter and buttermilk. Butter could be sold immediately for $4.40 per pound and buttermilk could be sold immediately for $2.40 per quart (note: two cups = one pound; four cups = one quart). Clover chooses to process the butter further into spreadable butter by mixing it with canola oil, incur- ring an additional cost of $3.20 per pound. This process results in two tubs of spreadable butter for each pound of butter processed. Each tub of spreadable butter sells for $4.60.
1. Allocate the $63,360 joint cost to the spreadable butter and the buttermilk using the following: a. Physical-measure method (using cups) of joint cost allocation b. Sales value at splitoff method of joint cost allocation c. NRV method of joint cost allocation d. Constant gross margin percentage NRV method of joint cost allocation
Further processing decision. Clover has decided that buttermilk may sell better if it was marketed for baking and sold in pints. This would involve additional packaging at an incremental cost of $0.70 per pint. Each pint could be sold for $1.50 (note: one quart = two pints).
1. If Clover uses the sales value at split off method, what combination of products should Clover sell to maximize profits?
2. If Clover uses the physical-measure method, what combination of products should Clover sell to maximize profits?
3. Explain the effect that the different cost allocation methods have on the decision to sell the products at split off or to process them further.