Elsie Dairy Products Corp buys one input, full-cream milk, and refines it in a churning process. From each gallon of milk, Elsie produces two cups (one pound) of butter and two quarts (eight cups) of buttermilk. During May 2012, Elsie bought 10,000 gallons of milk for $15,000. Elsie spent another $5,000 on the churning process to separate the milk into butter and buttermilk. Butter could be sold immediately for $2 per pound and but termilk could be sold immediately for $1.50 per quart.
Elsie chooses to process the butter further into spreadable butter by mixing it with canola oil, incurring an additional cost of $0.50 per pound. This process results in two tubs of spreadable butter for each pound of butter processed. Each tub of spreadable butter sells for $2.50.
REQUIRED
1. Allocate the $20,000 joint cost to the spreadable butter and the buttermilk using:
a. Physical measure method (using cups) of joint cost allocation.
b. Sales value at splitoff method of joint cost allocation.
c. NRV method of joint cost allocation.
d. Constant gross margin percentage NRV method of joint cost allocation.
2. Each of these measures has advantages and disadvantages; what are they?
3. Some claim that the sales value at splitoff method is the best method to use. Discuss the logic behind this claim.