Powisett Farms Dairy began operations at the start of May 2010. Powisett Farms operates a fleet of trucks to gather whole milk from local farmers. The whole milk is then separated into two joint products: skim milk and cream. Both products are sold at the split-off point to dairy wholesalers. For May, the firm incurred the following joint costs:

Whole milk purchase cost .......$400,000

Direct labor costs ........... 180,000

Overhead costs ........... 292,000

Total product cost ..........$872,000

During May, the firm processed 2,000,000 gallons of whole milk, producing 1,555,500 gallons of skim milk and 274,500 gallons of cream. The remaining gallons of the whole milk were lost during processing. There was no Raw Material or Work in Process Inventory at the end of May.

After the joint process, the skim milk and cream were separately processed at costs, respectively, of $67,660 and $83,310. Of the products produced, Powisett Farms Dairy sold 1,550,000 gallons of skim milk for $1,472,500 and 274,000 gallons of cream for $282,220 to wholesalers.

a. Powisett uses a physical measure (gallon) to allocate joint costs. Allocate the joint cost to production.

b. Calculate ending Finished Goods Inventory cost, Cost of Goods Sold, and gross margin for May.

c. A manager at Powisett Farms Dairy noted that the milk fat content of whole milk can vary greatly from farmer to farmer. Because milk fat content determines the relative yields of skim milk and cream from whole milk, the ratio of joint products can be partly determined based on the milk fat content of purchased whole milk.

How could Powisett Farms Dairy use information about milk fat content in the whole milk it purchases to optimize the profit realized on its joint products?