Question
Natures Finest Co. buys wood and uses it to make tables, chairs, and cabinets. A single block of wood can produce three chairs, one table,
Natures Finest Co. buys wood and uses it to make tables, chairs, and cabinets. A single block of wood can produce three chairs, one table, and one cabinet. Natures Finest is charged a processing cost of P4,500, P1,000, and P200 to sell the cabinets, tables, and chairs it extracts from a single block of wood. The cabinet sells for P6,000, the table for P1,500, and the chair for P500.
Natures Finest has a system that allocates the cost of a single block of wood to each of its three product lines by proportion of total number by block. The chief finance officer of the company believes this is a good natural allocation scheme.
Recently, the price of wood has risen to P2,000 per block. The CFO is worried that at least one of the products will not generate a profit due to the increase.
Based on the foregoing:
- What is the cost of wood allocated to each product line under the existing allocation scheme? Show your computations thoroughly.
- What is the net profit made by each product line after allocation of the cost of wood, using the current allocation scheme?
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