Reference no: EM132916974

Question - Clover Diary Products Company buys one input, full-cream milk, and refines it in a churning process. From every gallon of milk, Calgary produces two cups (one pound) of butter and two quarts (eight cups) of butter milk. During January 2020, Calgary bought 20,000 gallons of milk for $15,000. Calgary Dairy spent another $5,000 on the churning process to separate the milk into butter and buttermilk. The costs of recovery and disposal of toxic waste in the production process is $2,000. Butter could be sold immediately for $2 per pound and buttermilk could be sold immediately for $1.50 per quart. The final sales value of a byproduct that emerges in the production process is $1,200 and separable cost of the byproduct after splitoff point is $200. Calgary Dairy Products Company uses the Production Method for byproduct accounting.

Calgary Dairy choses to process the butter into spreadable butter by mixing it with canola oil, incurring and additional cost of $1.00 per pound. This process results in two tubs of spreadable butter for each pound processed.

Each tub of spreadable butter sells for $5.00.

Calgary Dairy has decided that buttermilk might sell better if it were marketed for baking and sold in pints. This would involve additional packing at an incremental cost of $0.25 per pint. Each pint could be sold for $0.90.

REQUIRED -

1. Allocate the joint costs to spreadable butter and butter milk using the Net Realizable Value Method of joint cost allocation.

2. Perform an incremental analysis to show what products Calgary Dairy should sell to maximize operating income?

3. What is the effect of the Sales Value method on the decision to sell the products at spilttoff point or process further?