Sudden Apex Company produces two products XX and YY from a s

Sudden Apex Company produces two products, XX and YY, from a single raw material called Zubricric. Zubricric is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of XX and 15 gallons of YY. XX sells for $10.00 per gallon and YY sells for $30.00 per gallon. During the current period, the company used 400 drums of Zubricric to produce XX and YY. The cost of Zubricric was $90 per drum.

Required:

(1) If the cost of Zubricric is allocated to the XX and YY products on the basis of the number of gallons produced, how much of the total cost of the 400 drums should be charged to each product?

(2) If the cost of Zubricric is allocated to the XX and YY products in proportion to their market values, how much of the total cost of the 400 drums should be charged to each product?

(3) Which basis of allocating the cost is most likely to be used by the company?

Solution

1)
on basis of gallons produced
400drums produce= 400*30XX and 400*15YY   = 12000XX   and 6000YY

hence, twice xx is produced than yy
so, as per cost xx= 400*90*2/3=24000$=2/3 0f total cost(36000)
cost xx= 400*90*1/3=12000$=1/3 of total cost(36000)

2)on basis of market value
xx price= 10 per gallon
yy price=30 per gallon

xx=1/4 of total sale
yy=3/4 of total sale
total cost =36000
so, cost xx= 1/4 of 36000= 9000$
cost yy=3/4 of 36000=27000$

3)the second method is more preferable as any company is more interested in finding amount of profit earned