Problem
Cinta Cosmetics purchase flowers in bulk and processes them into perfume. From a certain mix of petals, the firm uses Process A to generate Sandra, its high-grade perfume, as well as a certain residue. The residue is then further treated, using Process B, to yield Melissa, a medium-grade perfume. An ounce of residue typically yields an ounce of Melissa.
In July, the company used 25,000 pounds of petals. Costs involved in Process A, i.e. reducing the petals to Sandra and the residue, were:
Direct Materials - $400,000: Direct Labor - $200,000; Overhead Costs - $110,000.
The additional costs of producing Melissa in Process B were:
Direct Materials - $22,000: Direct Labor - $50,000; Overhead Costs - $40,000.
During July, Process A yielded 7,000 ounces of Sandra and 49,000 ounces of residue. From this 5,000 ounces of Sandrawere packaged and sold for $109.50 an ounce. Also, 28,000 ounces of Melissa were processed in Process B and then packaged and sold for $31.50 an ounce. The other 21,000 ounces remained as residue. Packaging costs incurred were $137,500
for Sandra and $196,000 for Melissa. The firm has no beginning inventory July 1.
If it so desired, the firm could have sold unpackaged Seduction for $56 an ounce and the residue from Process A for $24 an ounce.
1. What is the joint cost to be allocated to Sandra and Melissa?
2. Under the physical measure method, how would the joints costs be allocated to Sandra and Melissa?
3. Under the sales value at splitoff method, what portion of the joint costs would be allocated to Sandra and Melissa, respectively?
4. What is the estimated net realizable value per ounce of Sandra and Melissa?
5. Under the net realizable value method, what portion of the joint costs would be allocated to Sandra and Melissa, respectively?
6. What is the gross margin percentage for the firm as a whole?
7. Allocate the joint costs to Sandra and Melissa under the constant gross-margin percentage NRV method.
8. If you were the manager of Cinta Cosmetics, would you continue to process the petal residue in Romance perfume? Explain your answer.