Sinclair Oil & Gas, a large energy conglomerate, jointly processes purchased hydrocarbons to  generate three nonsaleable intermediate products: ICR8, ING4, and XGE3. These intermediate products are further processed separately to produce Crude Oil, Nat-ural Gas Liquids (NGL), and Natural Gas (measured in liquid equivalents). An overview of the process and results for August 2018 is shown here. (Note: The numbers are small to keep the focus on key concepts.)

A federal law has recently been passed that taxes crude oil at 30% of operating income. No new tax is to be paid on natural gas liquid or natural gas. Starting August 2018, Sinclair Oil & Gas must report a separate product-line income statement for crude oil. One challenge facing Sinclair Oil & Gas is how to allocate the joint cost of producing the three separate saleable outputs. Assume no beginning or ending inventory.

Required
1. Allocate the August 2018 joint cost among the three products using

a. Physical measure method.

b.  NRV method.

2. Show the operating income for each product using the methods in requirement 1.

3. Which, if any, method would you use for product emphasis? Explain.

4. Draft a letter to the taxation authorities on behalf of Sinclair Oil & Gas that justifies the joint cost alloca-tion method you recommend Sinclair use.

Transcribed Image Text:

- Joint Costs $1,800 Separable Costs Crude Oil Processing) $175 ICR8 150 barrels @ $18 per barrel NGL Hydrocarbons Processing Processing ING4 50 barrels @ $105 $15 per barrel Natural Gas Processing $210 800 eqvt. barrels @ $1.30 per eqvt. barrel XGE3