Reference no: EM132715756

Question - The Cardwell Company produces two products, turpentine and methanol by joint process.

At the split-off point, each batch produced totals 40,000 liters; 25% methanol and 75% turpentine. Joint costs amount to $144,000 per batch produced.

Both products are processed further without losses in volume. Separable processing costs are for methanol $0.90 per liter and for turpentine $0.60 per liter. Turpentine sells for $4.20 per liter and methanol sells for $6.30 per liter.

Required -

1. How much joint costs per batch should be allocated to turpentine and methanol, assuming that joint costs are allocated on a physical-measure basis (number of liters at the split-off point)?

2. If joint costs are assigned on an NRV basis, how much joint costs should be assigned to methanol and turpentine?

3. Prepare product-line income statements per batch considering that joint costs are allocated on an NRV basis.

4. The company has discovered an additional process by which methanol can be made into ethanol (wood alcohol). The selling price of ethanol would be $18 a liter. The additional processing would increase separate costs by $7.74 per liter and results in a loss of 10% of the liters entering the process. The company would have to pay excise taxes of 30% on the revenues generated by the product. Assuming no other changes in cost, what is the amount of joint cost applicable to the ethanol using the NRV method? Using the incremental analysis method, determine if the company should produce the ethanol?