The following questions are based on Seinfeld Corporation, which manufactures a product that gives rise to the by-product Castanza. The only cost associated with Castanza is the additional processing cost of $1 for each unit. Seinfeld accounts for Castanza sales first by deducting its separable costs from such sales and then by deducting this net amount from the cost of sales of the major product. (This is method 2 discussed in the text.) This year, 2,400 units of Castanza were produced; all were sold at $8 each.

Required

a. Sales revenue and cost of goods sold from the main product were $400,000 and $200,000, respectively, for the year. What was the gross margin after considering the by-product sales and costs?

b. If Seinfeld changes its method of accounting for Castanza sales by showing the net amount as other revenue, what would its gross margin be? Explain.

c. If Seinfeld changes its method of accounting as indicated in requirement (b), what are the effects of the change on the company’s profits?