By-ProductsMultiple Choice: The following questions are based on Eloise Corporation, which manufactures a product that gives rise to a by-product called Zet. The only costs associated with Zet are additional processing costs of $1 for each unit. Eloise accounts for Zet sales first by deducting its separable costs from such sales and then by deducting this net amount from the cost of sales of the major product. (This is method I discussed in the text. See Illustration 6-8, for example.) This year, 1,000 units of Zet were produced. They were all sold at $4 each.

Required:

a. Sales revenue and cost of goods sold from the main product were $400,000 and $200,000, respectively, for the year. What was the gross margin after considering the by-product sales and costs (that is, the "gross margin" in Illustration 6-8)?

(1) $200,000. (2) $203,000. (3) $196,000. (4) $197,000.

b. If Eloise changes its method of accounting for Zet sales by showing the net amount as "other income," Eloise's gross margin would:

(1) Be unaffected. (2) Increase by $3,000. (3) Decrease by $3,000. (4) Decrease by $4,000

c. If Eloise changes its method of accounting as indicated in

(b) above, what would be the effects of the change on the company's profits?

(1) No effect. (2) Increase by $3,000. (3) Decrease by $3,000. (4) Decrease by $4,000.