The Cook Company operates a simple chemical process to convert a single material into three separate items, referred to here as X, Y, and Z. All three end products are separated simultaneously at a single splitoff point.
Products X and Y are ready for sale immediately upon splitoff without further processing or any other additional costs. Product Z, however, is processed further before being sold. There is no available market price for Z at the splitoff point.
The selling prices quoted here are expected to remain the same in the coming year. During 2014, the selling prices of the items and the total amounts sold were as follows:
X— 68 tons sold for $ 1,200 per ton
Y— 480 tons sold for $ 900 per ton
Z— 672 tons sold for $ 600 per ton
The total joint manufacturing costs for the year were $ 580,000. Cook spent an additional $ 200,000 to finish product Z.
There were no beginning inventories of X, Y, or Z. At the end of the year, the following inventories of completed units were on hand: X, 132 tons; Y, 120 tons; Z, 28 tons. There was no beginning or ending work in process.
1. Compute the cost of inventories of X, Y, and Z for balance sheet purposes and the cost of goods sold for income statement purposes as of December 31, 2014, using the following joint cost allocation methods:
a. NRV method
b. Constant gross-margin percentage NRV method
2. Compare the gross-margin percentages for X, Y, and Z using the two methods given in requirement 1.