Montreal Dairy Products Company buys one input, full-cream milk, and refines it in a churning process. From every gallon of milk, Montreal produces two cups (one pound) of butter and two quarts (eight cups) of buttermilk. During January 2017, Montreal bought 20,000 gallons of milk for $15,000. Montreal Dairy spent another $5,000 on the churning process to separate the milk into butter and buttermilk. The costs of recovery and disposal of toxic waste in the production process is $2,000. Butter could be sold immediately for $2 per pound and buttermilk could be sold immediately for $1.50 per quart. Montreal Dairy chooses to process the butter into spreadable butter by mixing it with canola oil, incurring an additional cost of $1.00 per pound. This process results in two tubs of spreadable butter for each pound processed. Each tub of spreadable butter sells for $5.00. Montreal Dairy has decided that buttermilk might sell better if it were marketed for baking and sold in pints. This would involve additional packing at an incremental cost of $0.25 per pint. Each pint could be sold for $0.90. (Note 1 quart = 2 pints).

REQUIRED:

1. Allocate the joint costs to spreadable butter and buttermilk using the NRV method of joint cost allocation.

2. What combinations of products should Calgary Dairy sell to maximize operating income?

3. What is the effect of the NRV method on the decision to sell the products at spilttoff point or process further?