Question

Harper Chicken Corporation processes and packages chicken for grocery stores. It purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. From a standard batch of 25,000 pounds of raw chicken that costs $17,500, the company produces two parts: 4,400 pounds of drumsticks and 6,200 pounds of breast for a processing cost of $3,648. The chicken breast is further processed into 5,400 pounds of steak for a processing cost of $3,400. The market price of drumsticks per pound is $1.85 and the market price per pound of chicken steak is $5.40. If Harper decided to sell chicken breast instead of chicken steak, the price per pound would be $2.70.
Required:
a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.
a-2. Calculate the gross margin for each product.
a-3. If the drumsticks are producing a loss, should that product line be eliminated?
b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.
b-2. Calculate the gross margin for each product.
c-1. Should Martin further process chicken breasts into chicken steak? (Use the assumption made in requirement b-1).
c-2. How would the profit be affected by your answer in c-1?

Answer 1

Answer:

Please see answers below

Explanation:

1a . Allocate the joint cost to the joint products

The allocation rate will be computed as follows:

Allocation cost = Total cost / Total number of pounds ( Drumstick + Breast)

= $17,500 + $3,648 / 4,400 + 6,200

= $21,148 / 10,600

= $2.0

Allocation costs of

Drumstick = Allocation rate × Drumstick

= $2.0 × 4,400

= $8,800

Chicken breast = Allocation rate × Chicken breast

= $2.0 × 6,200

= $12,400

Total cost = $8,800 + $12,400 = $21,200

2a. Market price per pound of drumstick $1.85

Market price per pound of chicken breast $2.70

The revenue for drumstick is computed as;

= 4,400 × $1.85

= $8,140

The revenue for chicken breast is computed as;

= 6,200 × $2.70

= $16,740

Compute gross margin.

Gross margin = Revenue cost - Allocation cost

Drumstick = $8,140 - $8,800 = ($660)

Chicken breast = $16,740 - $12,400 = $4,340

3a. No. This is because the drumstick can be eliminated due to the loss they are incurring, hence contribute to the total joint cost

3b. Compute reallocation rate as;

Rate = Total allocation / Total market value of drumstick + Chicken breast

= $21,200 / (4,400 × $1.85) + (6,200 × $2.7)

= $21,200 / $8,140 + $16,740

= $21,200 / $24,880

= $0.85

Compute the market cost of;

Drumstick = $0.85 × 4,400 × $1.85

= $6,919

Chicken breast = $0.85 × 6,200 × $2.70

= $14,229

3b2 Compute gross profit margin for each

Drumstick = $8,140 - $6,919

= $1,221

Chick breast = $16,740 - $14,220

= $2,520