Reference no: EM133168691
Question - Joint Cost - Far Side Mining mines minerals used in artistic paints. The mining process yields three products from a single process: red pigments, blue pigments, and a clay-like by-product. The three products emerge from a single mining process. For every ton (2000 lbs) of mineral, the "Red" department can manufacture 600 lbs of red pigment, the "Blue" department can manufacture 800 lbs of blue pigment, and 600 lbs of clay-like by-product emerge. The red and blue pigments require additional processing before they can be sold.
Far Side sells the clay-like by-product in bulk to a secondary distributor. It costs Far Side $2.00/lb to transport the clay-like by-product to the secondary distributor. Far Side sells the clay-like by-product to the secondary distributor for $3.25/lb.
In a typical month, Far Side converts 40 tons (80,000 lbs) of mineral into the various pigments and the by-product, for a total joint cost of $580,000 (14,500 $/ton). If 40 tons of minerals are used in production and Far Side refines the minerals further, Far Side incurs $43,000 in additional processing costs for the blue pigment, and $38,000 in additional processing costs for the red pigment.
After the additional processing, Far Side can sell the red pigment for$15/lb and the blue pigment for $20/lb.
Far Side uses the net realizable value method for the clay-like by-product, and the approximate relative sales value method for joint products (the blue and red pigments).
1. What is the amount of joint cost applied to the clay-like by-product?
a: $0
b: $30,000
c: $192,710
d: $357,290
2. What is the amount of joint cost applied to the blue pigment?
a: $0
b: $30,000
c: $192,710
d: $357,290
3. What is the amount of joint cost applied to the red pigment?
a: $0
b: $30,000
c: $192,710
d: $357,290
4. What is the total joint cost applied to the three products (the red pigment, blue pigment, and by-product)?
a: $80,000
b: $550,000
c: $580,000
d: $919,000
5. If Far Side has the opportunity to sell the blue pigment at the split-off point (i.e. before incurring the additional costs required to process the blue pigment further) at a price of $18 per lb should Far Side process the pigment further or sell it at the split-off point?
a: Process the pigment further.
b: Sell at the split-off point.
c: Both provide the same level of profit
6. Would your answer to the immediately preceding question change if the joint costs were only allocated to the red and blue pigments (i.e. not Clay)?
a: No
b: Yes
c: I have no idea
7. If the processing cost of the clay-like by-product declined (got cheaper), what would happen to the joint cost allocated to Blue pigment?
a: Joint Cost allocated to Blue pigment would increase
b: Joint Cost allocated to Blue pigment would decrease
c: Joint Cost allocated to Blue pigment would remain the same
8. If the processing cost of Blue Pigment declined (got cheaper), what would happen to the joint cost allocated to Blue pigment?
a: Joint Cost allocated to Blue pigment would increase
b: Joint Cost allocated to Blue pigment would decrease
c: Joint Cost allocated to Blue pigment would remain the same
9. At the end of the month, a customer comes to Far Side with an order for 1,600 lbs of Blue Pigment. Based solely on profit considerations, should Far Side mine the extra two tons and fill this order?
Assume that Far Side can mine the extra two tons of material that would be needed to fill the order, but sales for the other products would not change. Also assume that the processing costs are perfectly variable by weight.
a: Yes
b: No
10. Suppose, instead, that at the end of the month, a customer comes to Far Side with an order for 1,200 lbs of Red Pigment. Based solely on profit considerations, should Far Side mine the extra two tons and fill this order?
Assume that Far Side can mine the extra two tons of material that would be needed to fill the order, but sales for the other products would not change. Also assume that the processing costs are perfectly variable by weight.
a: Yes
b: No
11. From question 10, why (about selling additional Red pigment)? Why should Far Side mine the two tons and fill this order?