Mesabi Metals buys raw ore on the open market and processes it into two products, A and B. The ore costs $11 per pound, and the process separating it into A and B has a cost of $4 per pound. During 20X1, Mesabi plans to produce 200,000 pounds of A and 800,000 pounds of B from 1,000,000 pounds of ore. A sells for $30 a pound and B for $15 a pound. The company allocated joint costs to the individual products for inventory valuation purposes.
1. Allocate all the joint costs to A and B using the physical-units method.
2. Allocate all the joint costs to A and B using the relative-sales-value method.
3. Suppose Mesabi cannot sell product B in the form in which it emerges from the joint process.
Instead, it must be processed further at a fixed cost of $200,000 plus a variable cost of $1 per pound. Then, it can be sold for $18.75 a pound. Allocate all the joint costs to A and B using the relative-sales-value method.