Problem
Hampton Lumber Mills Inc. produces lumber from farmed trees. Raw logs are delivered to the company's plant where they are processed up to the split-off point into three products: two-by-four lumber, two-by-six lumber and two-by-twelve lumber. Lumber is sold by the FBM (foot board measure), which is a common standard in the industry.
The joint costs of this process are $60,000, resulting in the following output:
Product Units Selling price per FBM
Two-by-four 90,000 FBM $0.30
Two-by-six 60,000 FBM $0.55
Two-by-twelve 40,000 FBM $0.70
Each of these products can be further refined by going through a process that smooths the board by running it through a planer. This additional process causes a decrease in the saleable output for each product by 1%. This process also increases the production cost and the sales value of the output as follows: (Note: all products are considered main products. There are no byproducts)
Product Further processing costs Finished selling price per FBM
Two-by-four $20,000 $0.50
Two-by-six $13,200 $0.80
Two-by-twelve $13,000 $0.90
Task
a) A schedule to determine the amount of joint cost allocated to each product if the Net Realizable Value method is used.
b) Should any of the products be sold at the split-off point and not processed further? If so, which one(s)? Show calculations.