Question

Valiant Petro products refines crude oil to produce gasoline and kerosene. Joint costs incurred during the month of May were $1,800,000. Gasoline requires further processing to be marketable and hence a further processing cost of $100,000 was incurred. Kerosene also requires further processing to be marketable and hence a further processing cost of $200,000 was incurred. Gasoline was sold at $4 per gallon and kerosene at $3.50 per gallon. During the month of May, 500,000 gallons of gasoline and 600,000 gallons of kerosene were processed. What is the production cost per gallon of gasoline for the month of May using the NRV method? Assume there was no beginning inventory.

Answer 1

Answer: $1,400,000

Explanation:

Joint cost = $1,800,000

Further processing cost(Gasoline) =$100,000

Further processing cost(kerosene) =$200,000

Price of gasoline = $4 per gallon

Price of kerosene = $3.50 per gallon

Processed gasoline in May = 500,000

Processed kerosene in May = 600,000

Allocation of joint cost(Gasoline) = (Total cost × share ratio)

Share ratio = further processing cost of component ÷ total further processing cost

[$1,800,000 × ( 100000 ÷ 300000)]

($1,800,000 × 0.33333333) = 599,999.999

Net realizable value = (Final sales price - processing cost)

[ $(500,000×4) - $600,000]

$2,000,000 - $600,000

$1,400,000

Production cost of gasoline is $1,400,000