Joint Cost Allocation—Market Value Method.

Minimax Corporation is a chemical manufacturer that produces two main products, Pepco-1 and Repke-3, and a by-product, SE-5, from a joint process. If Minimax had the proper facilities, it could process SE-5 further into a main product. The ratio of output quantities to input quantity of direct material used in the joint process remains consistent with the processing condi¬ tions and activity level.

Minimax currently uses the quantitative method of allocating joint costs to the main products. The fifo inventory method is used to cost the main prod¬ ucts. The by-product is inventoried at its net rev¬

enue, and this figure is used to reduce the joint pro¬ duction costs before the joint costs are allocated to the main products.

Jim Simpson, Minimax’s controller, wants to imple¬ ment the market value method of joint cost allocation. He believes that inventoriable cost should be based on each product’s ability to contribute to the recovery of joint production cost. The market value of the by-prod¬ uct would be treated in the manner it is treated under the quantitative method. LO5 Data regarding Minimax’s operations for November follow. The joint cost of production amounts to $2,640,000 for November.

Main Products By-Product Pepco-1 Repke-3 SE-5 Finished goods inventory in gallons on November1.

November sales ingallons.

November production ingallons.

Sales value per gallon at split-offpoint.

Additional processing cost aftersplit-off.

Final sales value pergallon.

. 20,000

. 800,000

. 900,000

. $ 2.00

. $1,800,000

. $ 5.00 40,000 700,000 720,000 $ 1.50

$720,000 $ 4.00 10,000 200,000 240,000 $ .55*

* Marketing costs of $.05 per gallon will be incurred in order to sell the by-product.

Required:

(1) Describe the market value method and explain how it accomplishes Jim Simpson’s objective.

(2) Assuming Minimax Corporation adopts the market value method for internal reporting purposes:

(a) Calculate how the joint production cost for November is allocated.

(b) Determine the cost assigned to finished goods inventories for Pepco-1, Repke-3, and SE-5 as of November 30.

(3) Minimax Corporation plans to expand its produc¬

tion facilities to enable the further processing of SE- 5 into a main product. Discuss how the allocation of the joint production cost under the market value method will change when SE-5 becomes a main product.