Accounting for a byproduct. Washington Oceanic Water (WOW) desalinates and bottles sea water. The desalinated water is in high demand from a large group of environmentally conscious people on the west coast of the United States. During March, WOW processes 1,000 gallons of sea water and obtains 800 gallons of drinking water and 50 pounds of sea salt (the rest of the sea water evaporates in the desalinization process). Processing the 1,000 gallons of water costs WOW $1,500. WOW sells 600 gallons of the desalinated water in 2-gallon containers for $8 per container In addition WOW sells 40 pounds of sea salt for $1.20 per pound. Due to the relatively small proportion of sea salt WOW has decided to treat it as a byproduct.

1. Assuming WOW accounts for the byproduct using the production method, what is the inventoriable cost for each product and WOW’s gross margin?

2. Assuming WOW accounts for the byproduct using the sales method, what is the inventoriahle cost for each product and WOW’s gross margin?

3. Discuss the difference between the two methods of accounting for byproducts.