Allocating joint product cost Mahdi Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 12,000 pounds of raw chicken that costs $7,000, the company produces two parts: 2,800 pounds of drumsticks and 4,200 pounds of breast for a processing cost of

$2,450. The chicken breast is further processed into 3,200 pounds of steak for a processing cost of

$2,000. The market price of drumsticks per pound is $1.00 and the market price per pound of chicken steak is $3.40. If Mahdi decided to sell chicken breast instead of chicken steak, the price per pound would be $2.00.

Required

a. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base. Calculate the net income for each product. Since the drumsticks are producing a net loss, should that product line be eliminated?

b. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base. Calculate the net income for each product. Compare the total net income

(drumsticks + breasts) computed in Requirement b with that computed in Requirement a above.

Explain why the total amount is the same. Comment on which allocation base (weight or market value) is more appropriate.

c. Should you further process chicken breasts into chicken steak?

Appendix