Problem

Multiproduct Corporation is a chemical manufacturer that produces two main products (Pepco-1 and Repke-3) and a by-product (SE-5) from a joint process. If Multiproduct had the proper facilities, it could process SE-5 further into a main product. The ratio of output quantities to input quantity of direct material used in the joint process remains consistent with the processing conditions and activity level.

Multiproduct currently uses the physical measure method of allocating joint costs to the main products. The by-product is inventoried at its net realizable value, which is used to reduce the joint production costs before they are allocated to the main products.

Jim Simpson, Multiproduct's controller, wants to implement the sales value method of joint cost allocation. He believes that inventory costs should be based on each product's ability to contribute to the recovery of joint production costs. Multiproduct uses an asset recognition approach in accounting for by-products.

Data regarding Multiproduct's operations for November are presented in the following report. The joint cost of production totaled $2,640,000 for November.

*Selling costs of 5 cents per gallon are incurred to sell the by-product.

Required

1. Describe the sales value method and explain how it would accomplish Jim's objective.

2. Assuming Multiproduct adopts the sales value method for internal reporting purposes, calculate the allocation of the joint product cost for November.

3. Multiproduct plans to expand its production facilities to further process SE-5 into a main product. Discuss how the allocation of the joint production costs under the sales value method will change when SE-5 becomes a main product.