Question:
(Allocation of joint cost) Nova Scotia Fish Processors produces three products from a common input: fish, fish oil, and fish meal. For June 2001, the firm produced the following average quantities of each product from each pound of fish processed:
|
Product
|
Obtained from Each Pound of Fish
|
|
Fish
|
8 ounces
|
|
Fish oil
|
4 ounces
|
|
Fish meal
|
2 ounces
|
|
Total
|
14 ounces
|
Note that 2 ounces of each pound (1 pound _ 16 ounces) of fish processed is waste that has no market value. In June, the firm processed 50 tons of fish (one ton is equal to 2,000 pounds). Joint cost amounted to $95,200. On average, each pound of fish sells for $3; each pound of fish oil sells for $4; and each pound of fish meal sells for $2.
a. Allocate the joint cost using weight as the basis.
b. Allocate the joint cost using sales value as the basis.
c. Discuss the advantages and disadvantages of your answers to parts (a) and (b).