Oregon Forests uses a joint process to manufacture two grades of wood: A and B. During October
Oregon Forests uses a joint process to manufacture two grades of wood: A and B. During October 2013, the company incurred $ 16,200,000 of joint production cost in producing 27,000,000 board feet of Grade A and 9,000,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet of lumber produced. The company can sell Grade A lumber at the split-off point for $ 0.70 per board foot. Alternatively, Grade A lumber can be further processed at a cost of $ 0.75 per board foot and then sold for $ 1.50 per board foot. No opportunity exists for processing Grade B lumber after split-off.
a. How much joint cost should be allocated to Grade A and to Grade B lumber?
b. If Grade A lumber is processed further and then sold, what is the incremental effect on Oregon Forest’ net income? Should the additional processing be performed?
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