Feed ‘N Grow manufactures three types of plant food using a joint process. The cost of materials used during a typical period is $100,000, while labour and overhead are $150,000. This level of operations results in 35,000 kilograms of PF1, 10,000 kilograms of PF2, and 5,000 kilograms of PF3. PF1 can be sold “as is” for $8/kg. PF2 can be sold “as is” for $3/kg. or processed further at a cost of $1.50/kg. and then sold for $4.5/kg (identify this end product as PF4). PF3 requires further processing costs of $1/kg and is eventually sold for $2.50/kg. 

REQUIRED:

A. Determine gross margin by product line if Feed ‘N Grow sells 30,000 kg of PF1, 7,000 kg. of PF2, and 5,000 kg of PF3 in a particular period. Feed ‘N Grow uses the NRV method to allocate joint costs.

B. Assume the fi rm does not sell PF2 “as is” but instead incurs separate processing costs of $15,000 per batch of 10,000 kg to finish the product. The finished products sell for $4.5/kg. Assume that Feed ‘N Grow sold 30,000 kg of PF1, 5,000 kg. of PF 4, and 5,000 kg. of PF3. What is the gross margin by product line for the period using the NRV method? Explain to management why processing PF2 further to PF4 caused the profitability of PF1 and PF3 to decline.

C. Assume that Feed ‘N Grow could sell the same number of kilograms of PF2 or PF4. Should the company process PF2 further into PF4 or sell it “as is”? Why?