Gavin West is a commercial fisherman, and he has just returned from a trip off the coast of Maine. He has calculated the cost of his catch as follows:
Wages of deckhands............. $30,000
Gavin's wage.................. $16,000
Food, medical supplies, etc............ $5,000
Depreciation of netting and other equipment.... $5,400
Depreciation of boat...............$12600
Fuel.................... $16,000
Total......................$85,000
Gavin's nets yielded a catch of 15,000 pounds of salmon, 23,000 pounds of halibut, and 37,000 pounds of flounder Salmon sells for $7 per pound, halibut for $5 per pound, and flounder for $3 per pound.
Required:
a. Allocate joint costs based on weight. With these costs, what is the profit associated with each type of fish?
b. Allocate joint costs based on relative sales values. With these costs, what is the profit associated with each type of fish?
c. Gavin is considering turning the flounder into fish paste. The incremental cost of this operation is $10,000. Each pound of flounder yields one-half pound of paste, and the paste sells for $6 per pound. Will Gavin be better off selling the flounder or turning it into paste? What role does the allocated joint cost play in this decision?