Question - A company manufactures two products, X and Y, from a single raw material called ZZ. ZZ is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of X and 15 gallons of Y. X sells for $10.00 per gallon and Y sells for $30.00 per gallon. During the current period, the company used 400 drums of ZZ to manufacture X and Y. The cost of ZZ was $90 per drum.
Required:
(1) If the cost of ZZ is allocated to the X and Y products on the basis of the number of gallons produced, how much of the total cost of the 400 drums should be charged to each product?
(2) If the cost of ZZ is allocated to the X and Y products in proportion to their market values, how much of the total cost of the 400 drums should be charged to each product?
(3) Which basis of allocating the cost is most likely to be used by the company? Check one and briefly explain
a) the relative number of gallons of each product produced.
b) the relative market values of each product at the point of separation.