SOLVE FOR C-2

Munoz 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 $8,500, the company produces two parts: 2,400 pounds of drumsticks and 5,200 pounds of breast for a processing cost of $4,748. The chicken breast is further processed into 4,400 pounds of steak for a processing cost of $2,400. The market price of drumsticks per pound is $1.70 and the market price per pound of chicken steak is $4.40. If Munoz decided to sell chicken breast instead of chicken steak, the price per pound would be $2.40.

Required

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

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

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

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

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

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

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