Clover Dairy Products Company buys one input, full-cream milk, and...

 

Clover Dairy Products Company buys one input, full-cream milk, and refines it in a churning process. From every gallon of milk, Clover produces two cups (one pound) of butter and two quarts (eight cups) of butter milk. During January 2020, Clover bought 20,000 gallons of milk for $15,000. Clover Dairy spent another $5,000 on the 

churning process to separate the milk into butter and buttermilk. The costs of recovery and disposal of toxic waste in the production process is $2,000. Butter could be sold immediately for $2 per pound and buttermilk could be sold immediately for $1.50 per quart. The final sales value of a byproduct that emerges in the production process is $1,200 and separable cost of the byproduct after splitoff point is $200. Clover Dairy Products Company uses the 

Production Method for byproduct accounting. Clover Dairy choses to process the butter into spreadable butter by mixing it with canola oil, incurring and additional cost of $1.00 per pound. This process results in two tubs of spreadable butter for each pound processed.  Each tub of spreadable butter sells for $5.00. Clover Dairy has decided that buttermilk might sell better if it were marketed for baking and sold in pints. This would involve additional packing at an incremental cost of $0.25 per pint. Each pint could be sold for $0.90. 

(Note 1 quart = 2 pints).

 

REQUIRED:

1. Allocate the joint costs to spreadable butter and butter milk using the Net Realizable Value Method of joint cost allocation.

2. Perform an incremental analysis to show what products Clover Dairy should sell to maximize operating income?

3. What is the effect of the Sales Value method on the decision to sell the products at spilttoff point or process further?

Q-1)

Joint Cost Allocation For Butter = $8400

Joint Cost Allocation For Butter Milk = $12600

Q-2) Incremental Analysis

Incremental Analysis Is Enclosed as image in Explanation

Decision:- As the Incremental Net income has increase in case of further processing of Butter so company should further process Butter but  the Incremental Net income has decreased in case of further processing of Butter Milk  so company should not further process Butter Milk 

Q-3) Effect of the Sales Value Method

There will be no impact of using sales value method on decision to sell the products at spiltt-off point or process further as whatever will be  the Joint Cost it will remained same under both option 

Step-by-step explanation

Q-1)

Total Joint Cost = Cost of Milk used + Cost of churning process + The costs of recovery and disposal of toxic waste - Net Realizable value of Byproduct at the time of production

= $15000 + $5000 + $20000 - ($1200 - $200)

= $21000

Production of Butter (in pounds) = 20000 gallons of Milk x 1 pound per gallon

= 20000 pounds

NRV of Butter = Production of Butter x Selling Price of Butter

= 20000 pounds x $2.00

= $40000

Production of Butter milk (in quart ) = 20000 gallons of Milk x 2 quart per gallon

= 40000 quarts

NRV of Butter Milk = Production of Butter Milk x Selling Price of Butter Milk

= 40000 quarts x $1.50

= $60000

Joint Cost Allocation For Butter = Total Joint Cost x NRV of Butter/(NRV of Butter + NRV of Butter Milk)

= $21000 x $40000/($40000 + $60000)

= $21000 x $40000/$100000

= $8400

Joint Cost Allocation For Butter Milk = Total Joint Cost x NRV of Butter Milk/(NRV of Butter + NRV of Butter Milk)

= $21000 x $60000/($40000 + $60000)

= $21000 x $60000/$100000

= $12600

Q-2) Incremental Analysis

Incremental Analysis oi Butter _ Net Income _ Sales at Split Particulars Process Further Increase! Sales ?ue ntit'yr 20000 pounds 40000 tubs Sales Value Less: allocated Joint Eost Less: Further Processing Eost Net Income Incremental Analysis oi Butter Mill: Net Income Process Further Increase} [Decrease] Sales at Split Particulars _ o? Point Sales?uentitllur Seles'lul'alue Less: Allocated Joint Cost Less: Further Processing Cost Net Income

Decision:- As the Incremental Net income has increase in case of further processing of Butter so company should further process Butter but  the Incremental Net income has decreased in case of further processing of Butter Milk  so company should not further process Butter Milk 

please see the attached file for complete solution.