Question 3 JOINT COSTING (14 MARKS) The Tree's Gifts Ltd manufactures three wood treatment products in a production process. Each product has certain finish and preservative properties that make it unique and useful for certain wood treatment requirements. Cost, production and price data for a typical month are presented in Exhibit 4 below. Exhibit 4. Cost, Production and Price Data Product Quantity Quantity Sold Sales Price Separable Produced (litres) (litres) ($/litre) Processing Cost ($/litre) FP-X 6000 5600 10.00 2.00 FP-Y 3000 2750 14.00 10.00 FP-Z 1000 1000 48.00 8.00 The starting input material costs are $32,500 for a typical month and joint conversion costs total $30,000 for the same period. If Tree's Gifts management decides not to process a product beyond the split-off point, all of the separable processing costs associated with that joint product can be eliminated entirely. Required: (a) Calculate the joint cost allocated to each of the 3 products using: i. The physical measures/units method; ii. The constant gross margin percentage net realisable value method. (7 marks) (b) Assume that all products are processed in separate departments after split-off point. i. Which of the above two allocation methods would the manager of the FP- X department prefer if s/he received a bonus based on product profitability? ii. In this situation, why is "product profitability" not a good measure to use for managerial assessment? (3 marks) (c) A new competitor enters the market and subsequent severe market pressure drives the price of FP-Y down to $11 per litre. Assume that product FP-Y can be sold at the split-off point for $3/litre. Should the company process FP-Y further? (4 marks) Question 3 JOINT COSTING (14 MARKS) The Tree's Gifts Ltd manufactures three wood treatment products in a production process. Each product has certain finish and preservative properties that make it unique and useful for certain wood treatment requirements. Cost, production and price data for a typical month are presented in Exhibit 4 below. Exhibit 4. Cost, Production and Price Data Product Quantity Quantity Sold Sales Price Separable Produced (litres) (litres) ($/litre) Processing Cost ($/litre) FP-X 6000 5600 10.00 2.00 FP-Y 3000 2750 14.00 10.00 FP-Z 1000 1000 48.00 8.00 The starting input material costs are $32,500 for a typical month and joint conversion costs total $30,000 for the same period. If Tree's Gifts management decides not to process a product beyond the split-off point, all of the separable processing costs associated with that joint product can be eliminated entirely. Required: (a) Calculate the joint cost allocated to each of the 3 products using: i. The physical measures/units method; ii. The constant gross margin percentage net realisable value method. (7 marks) (b) Assume that all products are processed in separate departments after split-off point. i. Which of the above two allocation methods would the manager of the FP- X department prefer if s/he received a bonus based on product profitability? ii. In this situation, why is "product profitability" not a good measure to use for managerial assessment? (3 marks) (c) A new competitor enters the market and subsequent severe market pressure drives the price of FP-Y down to $11 per litre. Assume that product FP-Y can be sold at the split-off point for $3/litre. Should the company process FP-Y further? (4 marks)