Problem 1: Spitz Dairy (Joint Costs) Spitz Dairy produces 3 different products: Butter, Cheese and Whey from Milk. The cost of Milk is $1.5 per gallon and one gallon of Milk yields 0.5 pounds of butter, 0.3 pounds of cheese and 0.1 pounds of whey. For a given period, Spitz Dairy processed 50,000 gallons of Milk. In addition to the cost of Milk, Spitz Dairy incurs joint process costs of $20,000. Below is more information on the three products produced during the period: Products Butter Cheese Whey (By-product) Pounds Produced Additional Processing Cost per pound beyond split- Sales Price per pound off 25,000 15,000 5,000 $1.6 $4.00 $2 5.50 $0.1 0.50 Spitz Dairy uses the Net Realized Value method to allocate joint costs to the by-product (whey) and the approximate relative sales value method to allocate joint costs to the main products. (1) Determine the reported profits of each product after allocation of joint costs. (3 points) (2) The company is considering selling butter directly at the split-off point as cultured cream for $2 per pound instead of further processing it into butter. In the plant space used for further processing butter, cheese can be processed even further to produce a flavored specialty cheese. The 15,000 pounds of cheese can be converted into 15,000 pounds of flavored specialty cheese that can be sold for $6.5 per pound. Spitz Dairy will incur additional processing costs of $0.5 per pound (i.e., in addition to the $2 per pound currently incurred to process cheese) to produce the specialty cheese. What is the effect on firm profits if the firm switches to this alternative production plan? What should the firm do? (3 points) 1) Profit for each product Product-level Consolidated Butter Cheese Whey Price/pound 4 5.5 0.5 Quantity (pounds) 25,000 15,000 5,000 Revenues ($) APC per pound ($) 1.60 2.00 0.10 Total APC ($) Net Realizable Value (NRV) Milk Cost/gallon 1.5 Milk processed (gallons) 50,000 Additional Joint Process Costs 20,000 Total Joint Costs (JC) ($) Allocated Joint Costs ($) Profits 2) Additional Processing decision Price per pound Current Proposed Butter after Butter at Specialty processing Cheese split-off cheese 4 5.5 2 6.5 25,000 15,000 25,000 15,000 2.50 Quantity (pounds) Revenues ($) APC per pound ($) 1.60 2.00 Total APC ($) Net Realizable Value (NRV)