Sun Valley Crush is a vineyard in New Mexico. They grow and process grapes into beverages, which they sell in bulk to other processors for bottling and distribution. For each ton of grapes processed, 200 gallons of pure grape juice and 100 pounds of grape seeds are produced. These are considered the joint products. 250 pounds of grape skins, which are considered a by-product, result from the initial process. The equipment in the crushing department can process one ton of grapes at a time, so the batch size is one ton of grapes processed.

The grapeseed can be processed into grapeseed powder. One pound of grapeseed can be processed into 0.95 pounds of grapeseed powder.

The grape juice can be sold at split-off, or processed into sparkling grape juice and table wine. One gallon of grape juice can be processed into 1.2 gallons of sparkling grape juice. 1.25 gallons of grape juice can be processed into one gallon of table wine

The following revenue and cost information is available:

Revenue:

Grapeseed $5.00 per pound

Grapeseed Powder $5.65 per pound

Grape Juice $4.50 per gallon

Sparkling Grape Juice $5.95 per gallon

Table Wine $8.00 per gallon

Crushing Department (the joint process):

Grapes $ 400 per ton

Conversion Costs $ 150 per ton

Separable Costs

Grapeseed to Grapeseed Powder

Other costs $0.80 per pound of grapeseed processed

Juice to Sparkling Juice

CO₂ $20 per canister (1 canister is required for each 50 gallons of sparkling juice; partial canisters can be used-in other words, if a canister is opened, the entire content doesnt have to be used)

Spring water $0.03 per gallon of juice processed (0.2 gallons added to each gallon of grape juice)

Other costs $0.50 per gallon of sparking juice produced

Juice to Table Wine

Wine yeast $0.50 per gallon of juice processed

Other costs $2.50 per gallon of wine produced

Grapeskins

Grapeskin sells for $0.75 per pound

Other Information:

Sun Valley can sell all it produces of all products.

Sun Valley uses the production method of accounting for by-products.

Sun Valley incurs fixed selling costs of $100 per batch + variable selling costs of 5% of revenue.

Requirements:

1. Draw a diagram of Sun Valleys processing system.

2. Which of the joint products should be processed further? What is the final mix of end products you recommend Sun Valley produce?

3. Use the sales value at split-off method to allocate joint costs to the final products you recommended.

4. Calculate Sun Valleys profit before tax (operating income) on each batch of grapes.

5. From a quantitative perspective, at what sales price would Sun Valley be indifferent to making sparking grape juice and table wine?

¹ 1 ton = 2,000 pounds

² .05 pounds of grapeseed is lost during the grinding process.

³ The pure grape juice is diluted to make the sparkling grape juice.

⁴ 20% of the grape juice is lost during the winemaking process.