Perez Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 16,000 pounds of raw chicken that costs $8,650, the company produces two parts: 2,500 pounds of drumsticks and 4,500 pounds of breast for a processing cost of $3,089. The chicken breast is further processed into 3,700 pounds of steak for a processing cost of $2,500. The market price of drumsticks per pound is $1.70 and the market price per pound of chicken steak is $4.50. If Perez decided to sell chicken breast instead of chicken steak, the price per pound would be $2.40.

Required

1. a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.

2. a-2. Calculate the gross margin for each product.

3. a-3. If the drumsticks are producing a loss, should that product line be eliminated?

4. b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.

5. b-2. Calculate the gross margin for each product.

6. c-1. Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).

7. c-2. How would the profit be affected by your answer in c-1?