Colombia Chemical Company is a highly diversified chemical processing company. The company manufactures swimming pool chemicals, chemicals for metal processing companies, specialized chemical compounds for other companies, and a full line of pesticides and insecticides. Currently, the Noorwood plant is
Currently, the Noorwood plant is producing two derivatives, RNA-1 and RNA-2, from the chemical compound VDB, developed by the company's research labs. Each week 1,200,000 pounds of VDB are processed at a cost of $246,000 into 800,000 pounds of RNA-1 and 400,000 pounds of RNA-2. The proportions of the two outputs cannot be altered. RNA-1 has no market value until it is converted into a product with the trade name Fastkil. The cost to process RNA-1 into Fastkil is $240,000. Fastkil wholesales at $50 per 100 pounds.
RNA-2 is sold as is for $80 per hundred pounds. However, the company has discovered that RNA-2 can be converted into two new products through further processing. The further processing requires the addition of 400,000 pounds of compound LST to the 400,000 pounds of RNA-2. This additional joint process yields 400,000 pounds each of DMZ-3 and Pestrol-two new products. The additional raw materials and related processing costs are $120,000. DMZ-3 and Pestrol can each be sold for $57.50 per 100 pounds. Management has decided not to process RNA-2 further, based on the preceding analysis. The company uses the average unit cost method to allocate costs arising from joint processing.
A new staff accountant, after reviewing the analysis, comments that it should be revised, stating: "Product costing of products such as these should be done on a market value basis, not an average unit cost basis."
(1) Discuss whether the use of the market value method provides data that are more relevant for the decision to market DMA-3 and Pestrol.
(2) Critique the company's analysis and make any revisions that are necessary. The critique and analysis should indicate:
(a) Whether the company made the correct decision.
(b) What the gross savings (loss) per week will be as a result of the decision not to process RNA-2 further (if different from the company's analysis).
Sells as RNA-2 Process Further Pestrol 400,000 Total DMZ-3 400,000 Production in pounds. Revenue 400,000 5320.000 $230,000 $230.000 S460,000 .. Costs: VDB cost $82,000 61,500 $61,500 $123,000 … Additional raw materials (LST Total cost.... Weekly gross profit.. If RNA-2 is sold as is, the allocation basis is 1,200,000 pounds; if RNA-2 is processed fur- 60,000120.000 皇121,500 $121,500 $243,000 and processing of RNA-2 $.82,000 238,000 108,500 108,500 $217000 ther, the allocation basis is 1,600,000 pounds for VDB cost.
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- Tutor Answer
1 The market value method does not provide additional data for the marketing decision Joint cost all…View the full answer
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