Hernandez Industries manufactures shampoo. Joint costs incurred total $20,000 fo
ID: 2459116 • Letter: H
Question
Hernandez Industries manufactures shampoo. Joint costs incurred total $20,000 for a stadard production run. A standard production run generates 5,000 gallons of Everyday Shampoo and 3,400 gallons of Specialty Shampoo. Everyday Shampoo sells for $9/gallon and Specialty Shampoo sells for $15/gallon. Currently all Specialty Shampoo is further processed into 3,200 gallons of Top Dollar Shampoo that sells for $21/gallon. (Further processing, at a costs of $12,200, involves adding a top secret, special ingredient and doing some additional refinement.) (A) How should the $20,000 of joint products costs be allocated under the Net Realizable Value Method? (Remember, Hernandez is currently producing Everyday Shampoo and Top Dollar Shampoo.) (B) Based on the profitability only, should Hernandez continue to convert all Specialty Shampoo into Top Dollar Shampoo? Show all calculations to support your answer.
Need your help please....Thank you...
Explanation / Answer
(A) The net realizable value method allocates joint costs on the basis of the final sales value less separable costs.
Here, the separable costs are not given for Everyday shampoo and Speciality shampoo but when we convert the speciality shampoo into Top dollar shampoo then a separate cost of $12200 is incurred.
Computation of Net Realizable Value
(45000/100000)*100
=45%
(45000/100000)*100
=55%
Allocation of Joint Cost of $20000
Allocation of joint cost
%NRV*Joint cost
=20000*45%
=$9000
=20000*55%
=$11000
(B) Calculation of profitability
=3400*15
=$51000
=3200*21
=$67200
Yes, Hernandez should continue to convert all Specialty Shampoo into Top Dollar Shampoo
Particulars Everyday Shampoo Top Dollar Shampoo Total Production 5000 gallons 3200 gallons 8200 gallons Selling Price per unit $9 $21 Final Sales Value (a) $45000 $67200 $112200 Separable Cost (b) - $12200 $12200 Net Realizable Value (a-b) $45000 $55000 $100000 %Net realizable value(45000/100000)*100
=45%
(45000/100000)*100
=55%