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Rhone Corporation produces a product called Sharone, which gives rise to a by-product called Erone. The only costs associated with Erone are additional processing costs of $2 for each unit. Rhone accounts for Erone's sales first by deducting its separable costs from its sales and then by deducting this net amount from the cost of goods sold of Sharone. This year, 4,800 units of Erone were produced. They were all sold for $10 each. Company operating expenses were $120,000 for the year. Sales revenue and cost of goods sold for Sharone were $800,000 and $400,000, respectively, for the year. (CPA adapteD
-If Rhone changes its method of accounting for Erone's sales, assuming that all of Erone's production is sold in the period that it is produced, what would be the effect on Rhone's overall profits?
A) Overall profit would increase
B) Overall profit would decrease
C) Overall profit would remain the same
D) Additional information is needed to determine the effect on overall profit

Question

Quizplus · Accepted Answer

The method of accounting for Erone's sales does not affect the overall profit because the total revenues and total costs for the company remain the same regardless of how the sales of Erone are accounted for. The accounting method only affects the allocation of costs and revenues between Sharone and Erone, not the overall profit of Rhone Corporation.

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