Production and sales information for these two products is below:

Units

Production (units) Sales price per unit

Required:

Main product Fine grain lumber Board-feet

50,000 $ 6.00

Byproduct Wood chips Cubic feet

4,000 $ 1.00

Luthers Lumber: Accounting for byproducts

Luther Translator manufactures lumber. One of his main products is fine-grain lumber, and a byproduct of this process is wood chips. Last month, Luthers Lumber incurred $250,000 in production costs for fine grain lumber.

1. Suppose Luther uses the production method to account for revenue from sales of wood chips. Calculate the gross margin in dollars and in percentages for each product and the company as a whole.

2. Suppose Luther uses the revenue method to account for revenue from sales of wood chips. Calculate the gross margin in dollars and in percentages for each product and the company as a whole.

3. Keegan-Michael Key works for Luther managing the sale of fine grain lumber. a. Suppose Mr. Keys bonus is based on the gross margin he is able to negotiate for fine grain

lumber only. Which revenue recognition methodology will he prefer?

b. Suppose instead that Mr. Keys bonus is based on total sales dollars for both fine grain lumber and wood chips. He finds that sales of fine grain lumber are a bit variable, but his sales targets are constant every period. He has been advocating that Luther adopt the revenue method of accounting for byproducts. Why?