Physical measure allocation Oregon Forests uses a joint process to manufacture t
ID: 2452118 • Letter: P
Question
Physical measure allocation Oregon Forests uses a joint process to manufacture two grades of wood: A and B. During October 2013, the company incurred $15,975,120 of joint production cost in producing 29,490,000 board feet of Grade A and 8,546,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet of lumber produced. The company can sell Grade A lumber at the split-off point for $0.70 per board foot. Alternatively, Grade A lumber can be further processed at a cost of $0.69 per board foot and then sold for $1.45 per board foot. No opportunity exists for processing Grade B lumber after split-off.
a. How much joint cost should be allocated to Grade A and to Grade B lumber?
Grade A $ 12385800
Grade B $ 3589320
b. If Grade A lumber is processed further and then sold, what is the incremental effect on Oregon Forest’ net income? $ ______.____
Should the additional processing be performed? Yes
I am just having problems solving for b.
Explanation / Answer
Answer:a Oregon Lumber would allocate 75 percent of the joint costs to Grade A lumber (77.53 percent = 29,490,000 Grade A board feet ÷ 38036000 total board feet), and 22.47 percent of the joint costs to Grade B lumber.
Grade A allocation:
$ 12385800 allocation = $15,975,120 joint costs × ( 29,490,000 Grade A board feet ÷ 38036000 total board feet)
Grade B allocation:
$ 3589320 allocation = $15,975,120 joint costs × ( 8,546,000 Grade B board feet ÷ 38036000 total board feet)
Answer:b If Grade A lumber is processed further and then sold, what is the incremental effect on Oregon Forest’ net income:
After processing net income=($1.45-$0.69-$0.42 )=0.34
Before processing net income=($0.70-$0.42)=0.28
Incremental net income=0.06
Grade A=$0.42 ( $ 12385800/29,490,000 board feet of Grade A )