Company A produces two productsmethanol (wood alcohol) and turpentine -- in a joint process. Joint costs amount
Question:
Company A produces two productsmethanol (wood alcohol) and turpentine -- in a joint process. Joint costs amount to $124,200 per batch of output. Each batch totals 13,500 gallons: 25% methanol and 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol, $11 per gallon; turpentine, $3 per gallon. Methanol sells for $22 per gallon. Turpentine sells for $16 per gallon.
The company has discovered an additional process by which the methanol (wood alcohol) can be made into a pleasant-tasting alcoholic beverage. The selling price of this beverage would be $42 a gallon. Additional processing would increase separable costs by $12 per gallon (in addition to the $11 per gallon separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the selling price of the beverage.
Requirement:Under the following assumptions, calculate the joint cost allocated (in total $) of the turpentine product.
- The firm chooses its product mix to maximizes operating profit.
- The firm uses the constant gross margin method to allocate joint costs.
- There are no beginning or ending inventories.