Question
The Rich and Creamy Chocolate Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products, chocolate-powder liquor base
The Rich and Creamy Chocolate Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products, chocolate-powder liquor base and milk-chocolate liquor base.
Every 500 pounds of cocoa beans yields 20 gallons of chocolate-powder liquor base and 30 gallons of milk-chocolate liquor base. The chocolate-powder liquor base is further processed into chocolate powder, with every 20 gallons of chocolate-powder liquor base yielding 200 lbs. of chocolate powder.
The milk-chocolate liquor base is further processed into milk chocolate, with every 30 gallons of milk-chocolate liquor base yielding 340 lbs. of milk chocolate.
There is an active market for the intermediate products where chocolate-powder liquor base sells for $21 per gallon and the milk-chocolate liquor base for $26 per gallon.
During August, 5,000 pounds of cocoa beans were processed and the cost of processing to the split-off point was $10,000. Production and sales data for August are:
| Production | Sales units | Sales price | Separable costs |
Chocolate powder | 2,000 pounds | 2,000 pounds | $4 / lb. | $4,250 |
Milk chocolate | 3,400 pounds | 3,400 pounds | $5 / lb. | $8,750 |
1. Diagram the production process. Include physical units, costs and revenues.
2.a. Allocate joint costs based on sales-value at the split-off point method.
2.b. Based on the sales-value at split-off point method, what is the profitability (i.e., what is the gross margin and GM %) of chocolate powder and milk chocolate?
3.a. Allocate joint costs based on the physical measure method.
3.b. Based on the physical measure method, what is the profitability of chocolate powder and milk chocolate?
4. Is it more profitable to process each of the products further, or to sell them at the split-off point?
Answer these questions:
- Joint costs allocated to chocolate-powder liquor base (CPLB) and milk chocolate liquor base (MCLB) using the sales-value at split-off method are:
| $3,750 to CPLB and $6,250 to MCLB | |
| $6,250 to CPLB and $3,750 to MCLB | |
| $3,500 to CPLB and $6,500 to MCLB | |
| $6,500 to CPLB and $3,500 to MCLB | |
| some other amount |
2.Based on the sales-value at split-off method, what is the gross margin of chocolate powder?
| $550 | |
| ($250) (Loss) | |
| ($550) (Loss) | |
| $250 | |
| some other amount | |
|
|
|
3.Based on the physical measure method, joint costs allocated to chocolate powder liquor base (CPLB) and milk chocolate liquor base (MCLB) would be:
| $4,000 to CPLB and $6,000 to MCLB | |
| $6,000 to CPLB and $4,000 to MCLB | |
| $6,500 to CPLB and $3,500 to MCLB | |
| $3,500 to CPLB and $6,500 to MCLB | |
| some other amount | |
|
|
|
4.Using the physical measure method, what is the gross margin of milk chocolate?
| $1,954 (rounded) | |
| $8,250 | |
| $9,000 | |
| ($250) loss | |
| some other amount |
5. Is it more profitable to process chocolate powder liquor base into chocolate powder or sell it at the split-off point?
| Process it further because gross margin for chocolate powder is positive | |
| Process it further because incremental revenues exceed incremental costs by $450 | |
| Sell it at the split-off point because gross margin for chocolate powder is negative | |
| Sell it at the split-off point because incremental costs exceed incremental revenues by $450 | |
| Some other answer |
6. Is it more profitable to process milk chocolate liquor base into milk chocolate or sell it at the split-off point?
| Process it further because incremental revenues exceed incremental costs by more than $500 | |
| Process it further because gross margin for milk chocolate is higher than gross margin for milk chocolate liquor base | |
| Process it further because incremental revenues exceed incremental costs by $450 | |
| Sell at the split-off point because incremental costs exceed incremental revenues by $450 | |
| some other answer |
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