Mandalay Industries buys crude oil. Refining this oil results in three products at the split-off point: heavy virgin naphtha, kerosene, and propane. All products can be processed further: heavy virgin naphtha can be processed into gasoline, kerosene can be processed into jet fuel, and propane can be processed into refinery fuel gas. The joint process cost for this month was $2,500,000. The output and unit selling prices at the split-off point are as follows:

Product Volume Unit selling price per litre

Heavy virgin naphtha 500,000 litres $6.00 per litre

Kerosene 250,000 litres $5.00 per litre

Propane 100,000 litres $4.00 per litre

As mentioned, all products are currently further processed. The separable costs for further processing, and the spoilage rate for each product are as follows:

Product Separable Cost Spoilage rate Unit selling price

Gasoline $1,600,000 6% $18.00 per litre

Jet fuel $750,000 4% $15.00 per litre

Refinery fuel gas $250,000 3% $5.00 per litre

There were no beginning inventories but at the end of the month, the following volumes were unsold:

Product Volume in ending inventory

Gasoline 40,000 litres

Jet fuel 30,000 litres

Refinery fuel gas 6,000 litres

The company uses the NRV method to allocate the joint cost.

Required: 1. Allocate the joint cost to each product using the NRV method. (6 marks)

2. Determine the balance in ending inventory, the cost of goods sold and the gross margin for each product for the month. (6 marks)

3. Given the above information, determine if the company is maximizing its gross margin by further processing all products. Based on your recommendation, calculate the revised gross margin for the company as a whole. (6 marks)