A chemical company has a batch process that takes 1,000 litres of a raw material and transforms it into 80 kilograms of X-1 and 400 kilograms of X-2.

Although the joint costs of their production are $1,200, both products are worthless at their split-off point. Additional separable costs of $350 are necessary to give X-1 a sales value of $1,000 as Product A. Similarly, additional separable costs of $200 are necessary to give X-2 a sales value of $1,000 as Product B.

You are in charge of the batch process and the marketing of both products.

(Show your computations for each answer.)

1.

a. Assuming that you believe in assigning joint costs on a physical basis, allocate the total profit of $250 per batch to Products A and B.

b. Would you stop processing one of the products? Why?

2.

a. Assuming that you believe in assigning joint costs on a net-realizablevalue basis, allocate the total operating profit of $250 per batch to Products A and B. If there is no market for X-1 and X-2 at their splitoff point, a net realizable value is usually imputed by taking the ultimate sales value at the point of sale and working backward to obtain approximated “synthetic” relative sales values at the split-off point.

These synthetic values are then used as weights for allocating the joint costs to the products.

b. You have internal product-profitability reports in which joint costs are assigned on a net-realizable-value basis. Your chief engineer says that, after seeing these reports, she has developed a method of obtaining more of Product B and correspondingly less of Product A from each batch, without changing the per-kilogram cost factors.

Would you approve this new method? Why? What would the overall operating profit be if 40 kilograms more of B were produced and 40 kilograms less of A?