Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 57

Find Maximum Input Price: Estimated Net Realizable Value Method

Ticon Corporation’s manufacturing operation produces two joint products. Product delta sells for y $24 per unit at the split-off point. After an additional $225,000 of processing costs are incurred, product omega sells for $81 per unit. In a typical month, 76,000 units are processed; 60,000 units become product delta and 16,000 units become product omega.

The joint process has only variable costs. In a typical month, the conversion costs of the joint products amount to $421,000. Materials prices are volatile, and if prices are too high, the company stops production.

Required

Management has asked you to determine the maximum price that the company should pay for the materials.

a.Calculate the maximum price that Ticon should pay for the materials.

---

b.Write a brief memo to management explaining how you arrived at your answer in requirement (a).

Step 1 of 4

a.

Maximum material price to be paid:

The maximum material price which the company can pay is calculated as follows:

	delta	omega	total
sales value	1,440,000	1,296,000	2,736,000
less: additional processing cost		225,000	225,000
estimated realizable value at split off point	1,440,000	1,071,000	2,511,000
allocated Joint Costs(all variable)
	241,433.69
		179,566.31
Contribution/maximum material price that can be paid.	1,198,566	891,434	2,090,000