joint cost

Question

Arkansas Corporation manufactures liquid chemicals A and B from a joint process. It allocates joint costs on the basis of sales value at split-off. Processing 5,000 gallons of product A and 1,000 gallons of product B to the split-off point costs $5,600. The sales value at split-off is $2 per gallon for product A and $30 for product B. Product B requires an additional separable process beyond split-off at a cost of $2.50 per gallon before it can be sold. What is the company’s cost to produce 1,000 gallons of product B?

Answer 1

Based on the sales value the proportion of the total value belonging to B is 1000*30/(5000*2+1000*30)=30000/40000=3/4. Applying this to the joint cost of production: 3/4*5600=$4200 for B.

So at split-off the cost of producing 1000 gallons of B is $4200, while that of 5000 gallons of A is $1400.

An additional cost of $2.50 per gallon amounts to $2500 on 1000 gallons, so the total cost of producing 1000 gallons of B beyond split-off is 4200+2500=$6700.