The Rainbow Oil Company buys crude vegetable oil Refining th

The Rainbow Oil Company buys crude vegetable oil. Refining this oil results in four products at the splitoff point. A, B, C, and D. Product C is fully processed by the splitoff point. Products A, B, and D can individually be further refined into Super A, Super B, and Super D. In the most recent month (December), the output at the splitoff point was as follows:

times •

Product A, 275,000 gallons

times •

Product B, 100,000 gallons

times •

Product C, 75,000 gallons

times •

Product D, 50,000 gallons

The joint costs of purchasing and processing the crude vegetable oil were

$105,000. Rainbow had no beginning or ending inventories. Sales of product C in December were $45,000. Products A, B, and D were further refined and then sold. Data related to December are as follows:

Separable Processing Costs

to Make Super Products

Revenues

Super A

$240,000

$375,000

Super B

60,000

150,000

Super D

45,000

75,000

Rainbow had the option of selling products A, B, and D at the splitoff point. This alternative would have yielded the following revenues for the December production:

times •

Product A, $ 75 comma 000$75,000

times •

Product B, $ 62 comma 500$62,500

times •

Product D, $ 67 comma 500$67,500

1.

Compute the gross-margin percentage for each product sold in December, using the following methods for allocating the $105,000 joint costs:

a.

Sales value at splitoff

b.

Physical-measure

c.

NRV

2.

Could Rainbow have increased its December operating income by making different decisions about the further processing of products A, B, or D? Show the effect on operating income of any changes you recommend.

times •	Product A, 275,000 gallons
times •	Product B, 100,000 gallons
times •	Product C, 75,000 gallons
times •	Product D, 50,000 gallons

Solution

Answer 1-a. Sales Value at Splitoff Computation of Joint Cost Allocations Product Sales Value of Total Production at Split-off Weighting Allocation of Joint Costs A                   75,000.00 30%              31,500.00 B                   62,500.00 25%              26,250.00 C                   45,000.00 18%              18,900.00 D                   67,500.00 27%              28,350.00                 250,000.00 100%           105,000.00 Computation of Gross Margin Percentage Super A Super B C Super D Total Revenues                 375,000.00         150,000.00              45,000.00       75,000.00           645,000.00 Joint Costs                   31,500.00           26,250.00              18,900.00       28,350.00           105,000.00 Separable Costs                 240,000.00           60,000.00                             -         45,000.00           345,000.00 Total Cost of Goods Sold                 271,500.00           86,250.00              18,900.00       73,350.00           450,000.00 Gross Margin                 103,500.00           63,750.00              26,100.00          1,650.00           195,000.00 Gross Margin Percentage 27.60% 42.50% 58.00% 2.20% 30.23% Answer 1-b. Physical measure Method Product Physical Measure of Total Production (In Gallons) Weighting Allocation of Joint Costs A                 275,000.00 55%              57,750.00 B                 100,000.00 20%              21,000.00 C                   75,000.00 15%              15,750.00 D                   50,000.00 10%              10,500.00 Total                 500,000.00 100%           105,000.00 Computation of Gross Margin Percentage Super A Super B C Super D Total Revenues                 375,000.00         150,000.00              45,000.00       75,000.00           645,000.00 Joint Costs                   57,750.00           21,000.00              15,750.00       10,500.00           105,000.00 Separable Costs                 240,000.00           60,000.00                             -         45,000.00           345,000.00 Total Cost of Goods Sold                 297,750.00           81,000.00              15,750.00       55,500.00           450,000.00 Gross Margin                   77,250.00           69,000.00              29,250.00       19,500.00           195,000.00 Gross Margin Percentage 20.60% 46.00% 65.00% 26.00% 30.23% Answer 1-c. NRV Method Product Final Sales Value of Total Production Separable Costs NRV at Splitoff Weighting Allocation of Joint Costs Super A                 375,000.00         240,000.00           135,000.00 45%             47,250.00 Super B                 150,000.00           60,000.00              90,000.00 30%             31,500.00 C                   45,000.00                           -                45,000.00 15%             15,750.00 Super D                   75,000.00           45,000.00              30,000.00 10%             10,500.00 Total                 645,000.00         345,000.00           300,000.00 100%           105,000.00 Computation of Gross Margin Percentage Super A Super B C Super D Total Revenues                 375,000.00         150,000.00              45,000.00       75,000.00           645,000.00 Joint Costs                   47,250.00           31,500.00              15,750.00       10,500.00           105,000.00 Separable Costs                 240,000.00           60,000.00                             -         45,000.00           345,000.00 Total Cost of Goods Sold                 287,250.00           91,500.00              15,750.00       55,500.00           450,000.00 Gross Margin                   87,750.00           58,500.00              29,250.00       19,500.00           195,000.00 Gross Margin Percentage 23.40% 39.00% 65.00% 26.00% 30.23% Answer 2. Further Processing of A Into Super A B Into Super B D Into Super D Incremental Revenue                 300,000.00           87,500.00                7,500.00 Incremental Cost                 240,000.00           60,000.00              45,000.00 Incremental Operating Income (Loss) from Further Processing                   60,000.00           27,500.00           (37,500.00)