Atlantic Timber processes timber into Grade A and Grade B lumber. Timber costs $200 per unit, where one unit equals 1,000 board feet. The process involves cutting timber into the two grades of lumber. Each unit of timber produces .25 unit (250 board feet) of Grade A lumber with a market value of $240 and .75 unit (750 board feet) of Grade B with a market value of $160. The joint cost of the production process is $100 per unit.
a. Assume that the joint costs of the two grades of lumber are to be allocated on the basis of units of output. What cost is assigned to each product (for .25 unit of Grade A and .75 unit of Grade B)?
b. If the joint costs are allocated on the basis of the net realizable value, what cost is assigned to each product? How much profit or loss does the Grade A lumber earn? Is it really possible to determine which product is more profitable? Explain why or why not.