Sinclair Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate three nonsalable intermediate products: ICR8, ING4, and XGE3. These intermediate products are further processed separately to produce crude oil, natural gas liquids (NGL), and natural gas (measured in liquid equivalents).

A federal law that has recently been passed taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquid or natural gas.

Starting August

20172017,

Sinclair Sinclair

Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing

Sinclair Sinclair

Oil & Gas is how to allocate the joint cost of producing the three separate salable outputs. Assume no beginning or ending inventory.

An overview of the process and results for August 2017 are shown here (Note: The numbers are small to keep the focus on key concepts.) Joint Costs Separable Costs $2.100 Processing Crude Oil ICRS 200 barrels @ $175 $20 per barrel Hydrocarbons Processing Processing ING- NGL 100 barrels @ $19 per barrel XGE: Processing Natural Gas 700 egut. barrels @ $1.20 per evt. barrel