Problem:
Sarah and Stew Salsa own and operate a tomato grove. After preparing the following income statement, Sarah believes they should have offered the No. 3 tomatoes to the public for free and saved themselves time and money.
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SARAH AND STEW SALSA
Income Statement
For Year Ended December 31, 2011
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No. 1
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No. 2
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No. 3
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Combined
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Sales (by grade)
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No 1: 400,000 Ibs @ $150/lb
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$600,000
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No 2: 300,000 Ibs @ $100/lb
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$300,000
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No 3: 100,000 Ibs @ $030/lb
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$ 30,000
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Total sales
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$930,000
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Costs
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Land preparation, seeding, and cultivating @ $050/Ib
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200,000
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150,000
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50,000
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400,000
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Harvesting, sorting, and grading @ $002/Ib
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8,000
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6,000
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2,000
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16,000
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Delivery costs @ $001/lb
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4,000
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3,000
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1,000
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8,000
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Total costs
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212,000
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159,000
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53,000
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424,000
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Net income (loss)
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$388,000
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$141,000
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$(23,000)
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$506,000
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In preparing this statement, Sarah and Stew allocated joint costs among the grades on a physical basis as an equal amount per pound. Also, their delivery cost records show that $7,000 of the $8,000 relates to crating the No. 1 and No. 2 tomatoes and hauling them to the buyer. The remaining $1,000 of delivery costs is for crating the No. 3 tomatoes and hauling them to the cannery.
Required
1. Prepare reports showing cost allocations on a sales value basis to the three grades of tomatoes. Separate the delivery costs into the amounts directly identifiable with each grade. Then allocate any shared delivery costs on the basis of the relative sales value of each grade. (Round percents to the nearest onetenth and dollar amounts to the nearest whole dollar.)
2. Using your answers to part 1, prepare an income statement using the joint costs allocated on a sales value basis.
3. Do you think delivery costs fit the definition of a joint cost? Explain.