Question: Alternative methods of joint-cost allocation, product-mix decisions. The Chicago Oil Company buys crude vegetable oil. Refining this oil results in four products at the splitoff point: A, B, C, and D. Product C is fully processed by the splitoff point. Products A, B, and D can individually be further refined into Super A, Super B, and Super D. In the most recent month (November), the output at the splitoff point was as follows:
- Product A, 550,000 gallons
- Product B, 200,000 gallons
- Product C, 150,000 gallons
- Product D, 100,000 gallons
The joint costs of purchasing and processing the crude vegetable oil were $210,000. Chicago had no beginning or ending inventories. Sales of product C in November were $90,000. Products A, B, and D were further refined and then sold. Data related to November are as follows:
Separable Processing Costs to Make Super Products Revenues
Super A $480,000 $750,000
Super B 120,000 300,000
Super D 90,000 150,000
Chicago had the option of selling products A, B, and D at the splitoff point. This alternative would have yielded the following revenues for the November production:
- Product A, $150,000
- Product B, $125,000
- Product D, $135,000
1. Compute the gross-margin percentage for each product sold in November, using the following methods for allocating the $210,000 joint costs:
a. Sales value at splitoff
b. Physical measure
c. NRV
2. Could Chicago Oil have increased its November operating income by making different decisions about the further processing of products A, B, or D? Show the effect on operating income of any changes you recommend.