Assignment : Cost Allocation Joint Products and Byproducts

Reminders:

1. Solution must bedifferent as much as possiblefrom solution manual of horngren.
2. Excel format isa must.

Problem 1:Joint costs and decision making.

Jack Bibby is a prospector in the Texas Panhandle. He has also been running a side business for the past couple of years. Based on the popularity of shows such as "Rattlesnake Nation," there has been a surge of interest from professionals and amateurs to visit the northern counties ofTexas to capture snakes in the wild. Jack has set himself up as a purchaser of these captured snakes.

Jack purchases rattlesnakes in good condition from "snake hunters" for an average of $11 per snake. Jack produces canned snake meat, cured skins, and souvenir rattles, although he views snake meat as his primary product. At the end of the recent season, Jack Bibby evaluated his financial results:

Meat Skins Rattles Total

Sales revenues $33,000 $8,800 $2,200 $44,000

Share of snake cost 19,800 5,280 1,320 26,400

Processing expenses 6,600 990 660 8,250

Allocated overhead 4,400 660 440 5,500

Income (loss) $ 2,200 $1,870 ($220) $3,850

The cost of snakes is assigned to each product line using the relative sales value of meat, skins, and rattles (i.e., the percentage of total sales generated by each product). Processing expenses are directly traced to each product line. Overhead costs represent Jack's basic living expenses. These are allocated to each product line on the basis of processing expenses. Jack has a philosophy of every product line paying for itself and is determined to cut his losses on rattles.

Required:

1.Should Jack Bibby drop rattles from his product offerings? Support your answer with computations.

2.An old miner has offered to buy every rattle "as is" for $0.60 per rattle (note: "as is" refers to the situation where Jack only removes the rattle from the snake and no processing costs are incurred). Assume that Jack expects to process the same number of snakes each season. Should he sell rattles to the miner? Support your answer with computations.

Problem 2:Process further or sell, byproduct. (CMA, adapted)

Newcastle Mining Company(NMC) mines coal, puts it through a one-step crushing process, and loads the bulk raw coal onto river barges for shipment to customers. NMC's management is currently evaluating the possibility of further processing the raw coal by sizing and cleaning it and selling it to an expanded set of customers at higher prices. The option of building a new sizing and cleaning plant is ruled out as being financially infeasible. Instead, Amy Kimbell, a mining engineer, is asked to explore outside-contracting arrangements for the cleaning and sizing process. Kimbell puts together the following summary:

1 Selling price of raw coal 2 Cost of producing raw coal A 3 Selling price of sized and cleaned coal 4 Annual raw coal output 5 Percentage of material weight loss in sizing/cleaning coal 6 7 8 Direct labor 9 Supervisory personnel 10 Heavy equipment: rental, operating, maintenance costs 11 Contract sizing and cleaning 12 Outbound rail freight 13 14 Percentage of sizing/cleaning waste that can be salvaged for coal fines 15 Range of costs per ton for preparing coal fine for sale 16 Range of coal fine selling prices (per ton) B $30 per ton $21 per ton $34 per ton 9,000,000 tons 6% Incremental Costs of Sizing & Cleaning Processes $790,000 per year $190,000 per year $35,000 per month $3.30 per ton of raw coal $250 per 60-ton rail car 75% $3 $5 $14 $25