Task: Stowers Corporation manufactures products J, K, and L in a joint process. Here is cost data for a recent month, up to the split-off point in the joint process:
Direct materials used $ 200,000
Direct labor 100,000
Manufacturing overhead
Variable 200,000
Fixed 400,000
Total manufacturing costs prior to split-off $ 900,000
Here is additional information about the products that were produced during that month:
Totals for each product
J K L
Gallons produced during the month 50,000 70,000 80,000
Sales value (total) at the split-off point $ 300,000 $ 350,000 $ 350,000
Sales value (total) if processed beyond the split-off point $ 425,000 $ 546,000 $ 438,000
Total cost of processing beyond the split-off point $ 130,000 $ 192,500 $ 80,000
An analysis revealed that all costs incurred after the split-off point are variable and are directly traceable to the individual product lines.
Required:
1) If Stowers allocates joint costs on the basis of relative total sales value at the split-off point, what is the cost per gallon of each product at the split-off point? What would be the gross margin (profit or loss) per gallon from each product if it were sold at this point?
2) If Stowers allocates joint costs on the basis of quantities (total gallons) produced, what is the cost per gallon of each product at the split-off point? What would be the gross margin (profit or loss) per gallon from each product if it were sold at this point?
3) Which, if any, of the products should be sold at the split-off point, and which should be processed further before they are sold? Why?