Allocating Joint Costs Using the Constant Gross Margin Method

A company manufactures three products, L-Ten, Triol, and Pioze, from a joint process. Each production run costs $12,900. None of the products can be sold at split-off, but must be processed further. Information on one batch of the three products is as follows:

Product	Gallons	Further Processing Cost per Gallon	Eventual Market Price per Gallon
L-Ten	3,500	$0.50	$ 2.00
Triol	4,000	1.00	5.00
Pioze	2,500	1.50	6.00

Required:

1. Calculate the total revenue, total costs, and total gross profit the company will earn on the sale of L-Ten, Triol, and Pioze.

Total Revenue	$fill in the blank 1
Total Costs	$fill in the blank 2
Total Gross Profit	$fill in the blank 3

2. Allocate the joint cost to L-Ten, Triol, and Pioze using the constant gross margin percentage method. Round the gross margin percentage to four decimal places and round all other computations to the nearest dollar.

	Joint Cost
Product	Allocation
L-Ten	$fill in the blank 4
Triol	fill in the blank 5
Pioze	fill in the blank 6
Total	$fill in the blank 7

(Note: The joint cost allocation does not equal $12,900 due to rounding.)

3. What if it cost $2 to process each gallon of Triol beyond the split-off point? How would that affect the allocation of joint cost to these three products? Round the gross margin percentage to four decimal places and round all other computations to the nearest dollar.

	Joint Cost
Product	Allocation
L-Ten	$fill in the blank 8
Triol	fill in the blank 9
Pioze	fill in the blank 10
Total	$fill in the blank 11

(Note: The joint cost allocation does not equal $12,900 due to rounding.)

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1. The constant gross margin percentage method is used to avoid assuming that all profit occurs at the split-off point. It allocates joint cost to ensure that the same gross profit is applicable to all products.

2. Remember that the gross margin percentage is a function of revenues.

3. To show what would happen if the cost changed, see Example 7.11.