Jernimos Ltda produces two products, turpentine and methanol (wood alcohol), by a joint process. Joint costs amount

Jerónimos Ltda produces two products, turpentine and methanol (wood alcohol), by a joint process. Joint costs amount to €120 000 per batch of output. Each batch totals 40 000 liters: 25% methanol and 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs include: methanol, €0.75 per liter, and turpentine, €0.5 per liter. Methanol sells for €5.25 per liter; turpentine sells for €3.5 per litre.

Required

1. What joint costs per batch should be allocated to the turpentine and methanol, assuming that joint costs are allocated on a physical measure (number of liters at split-off point) basis?

2. If joint costs are to be assigned on an estimated NRV basis, what amounts of joint cost should be assigned to the turpentine and to the methanol?

3. Prepare product-line income statements per batch for requirements 1 and 2. Assume no opening or closing stocks.

4. The company has discovered an additional process by which the methanol can be made into a pleasant tasting alcoholic beverage. The new selling price would be €15 per liter. Additional processing would increase separable costs by €2.25 per liter (in addition to the €0.75 separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the new selling price. Assuming no other changes in cost, what is the joint cost applicable to the methanol (using the estimated NRV method)? Should the company use the new process?