St.Thomas Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to generate three nonsaleable 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). An overview of the process and results for August 2014

are shown here (Note: The numbers are small to keep the focus on key concepts.)

Joint Cost Separable Costs

$1900 ICR8 => processing $130 Crude Oil 150 barrels @ $20 per

Hydrocarbons Processing ING4 => processing $125 NGL 125 barrels @ $19 per

XGE3 => processing $235 Natural Gas 975 eqvt bar.@$1.40

A new federal law has recently been passed that taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquid or natural gas. Starting August 2014, St.Thomas

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

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

1.	Allocate the August 2014 joint cost among the three products using the following:
	a. Physical-measure method
	b.NRV method.
2.	Show the operating income for each product using the methods in requirement 1.
3.	Discuss the pros and cons of the two methods to St.Thomas Oil & Gas for making decisions about product emphasis (pricing, sell-or-process-further decisions, and so on).