Arctic Blast Water (ABW) desalinates and bottles sea water.

The desalinated water is in high demand from a large group of environmentally conscious people on the west coast of Canada. During March,

ABW processes 900 litres of sea water and obtains 900 litres of drinking water and 55 kilograms of sea salt (the rest of the sea water evaporates in the desalinisation process). Processing the 900 litres of water costs ABW $1,400.

ABW sells 30 litres of the desalinated water in 2 litre containers for $10 per container. In addition, ABW sells 45 kilograms of sea salt for $1.50 per kilogram. Due to the relatively small proportion of sea salt, ABW has decided to treat it as a by -product.

Requirements

1)

Assuming ABW accounts for the by-product using the production

method, what is the inventoriable cost for each product and ABW's gross margin?

2)

Assuming ABW accounts for the by-product using the sales method, what is the inventoriable cost for each product and ABW's gross

margin?

3)

Which method is most appropriate for ABW? Explain the reason for your choice.