Davidson Food Processing Company produces its popular brand of boneless canned chicken (“Chick’n Good”) at its plant in Iowa. On the average, a 3-pound (48 ounces) chicken can be purchased by the firm for $1.80 per chicken. Normal production for the firm is 240,000 chickens per month. Information for each step in the production process is as follows:

Cleaning Department

Each chicken first goes through the cleaning department. For each chicken, the cleaning department produces 2 ounces of feathers and 46 ounces of cleaned chicken. Cleaned chickens could be sold to a food processor for $0.72

/pound. The feathers have no market value and are disposed of. The Cleaning department has $54,000 of fixed costs per month and variable costs $0.06 per pound of raw chicken (before cleaning).

Butchering Department

The cleaned chickens go to the butchering department. For each chicken, the butchering department produces 7.2 ounces of internal organs, 9.6 ounces of bones and 29.2 ounces of boned chicken. Internal organs are sold to cat and dog food manufacturers for $1.20 per pound while bones are sold to animal feed producers for $0.75 per pound. Boned chicken could be sold to food processors for $1.35 per pound. The Butchering department has $67,500 of fixed costs per month and variable costs of $0.21 per pound processed.

Canning Department

The boned chicken goes to the canning department. Every 29.2 ounces of boned chicken is picked thru and produces two 14 ounces cans of Chicken Good. The remaining 1.2 ounces of product is waste. Cans of Chicken Good are sold to Food wholesalers for $3.45 per can. The Canning department has $42,000 of fixed costs and variable costs of $1.62 per pound processed.

Required

1. Calculate the inventoriable cost per can of Chicken Good assuming that Davidson uses the physical units method to allocate joint production costs. Round your answer to the nearest tenth of a cent.

2. Calculate the inventoriable cost per can of Chicken Good assuming that Davidson uses the market value at a split-off method to allocate joint production costs. Round your answer to the nearest tenth of a cent.

3. Compare the gross margin for each product (and in total) under the physical units method to the gross margin using the market value at split-off method. How does gross margin change? Do any of the products produce a negative gross margin? If so, should the company consider discontinuing the sale of this item(s)?

4. Which method of allocation would you recommend to Davidson? Why? What are the advantages and disadvantages of each method?

5. A bedding company manufacturer approaches Davidson regarding the feathers that are produced by the cleaning department. The bedding company would be willing to purchase cleaned, dried, and fluffed feathers for $0.60 per pound. In order to clean, dry, and fluff the feathers, Davidson would incur additional fixed costs of $18,000 per month and variable costs of $0.15 per pound of feathers. Assume that Davidson uses the physical units method to allocate joint production costs. Should they pursue this opportunity? Would your answer change if they used the market value at a split-off method to allocate joint production costs?

6. Davidson feels that the margin on internal organs is small and may be improved by shredding the organs prior to selling them. Shredded organs could be sold for $1.65 per pound. Additional fixed costs of $9,000 per month would need to be incurred (for the shredder) and variable costs of $0.21 per pound of internal organs. Assume that Davidson uses the physical units method to allocate joint production costs. Should they pursue this opportunity? Would your answer change if they used the market value at a split-off method to allocate joint production costs?