How much (if any)extra income would Morton earn if it produced and sold skim milk ice cream from goats rather than goat skim milk? Allocate joint processing costs based upon the relative sales value at the splitoff point.
A)$94,094
B)$234,594
C)$203,300
D)$140,500

Question

Quizplus · Accepted Answer

To determine if producing skim milk ice cream from goats would result in extra income, we need to compare the sales value of the current production (goat skim milk) to the potential sales value of the new production (skim milk ice cream from goats).

Let's assume that at the splitoff point, Morton produces 10,000 gallons of goat skim milk and would be able to produce 3,000 gallons of skim milk ice cream from the same amount of goats. Further, let's assume that the selling price per gallon of goat skim milk is $20 and the selling price per gallon of skim milk ice cream from goats is $35.

Next, we need to allocate the joint processing costs between the two products based on their relative sales value at the splitoff point. To do this, we'll use the sales value method:

Total sales value at splitoff = sales value of goat skim milk + sales value of potential skim milk ice cream from goats 
Total sales value at splitoff = ($20/gallon x 10,000 gallons of goat skim milk) + ($35/gallon x 3,000 gallons of skim milk ice cream from goats) 
Total sales value at splitoff = $200,000 + $105,000 
Total sales value at splitoff = $305,000

Now, to allocate the joint processing costs to each product:

Allocation to goat skim milk = (sales value of goat skim milk / total sales value at splitoff) x joint processing costs 
Allocation to goat skim milk = ($200,000 / $305,000) x $300,000 
Allocation to goat skim milk = $196,721

Allocation to skim milk ice cream from goats = (sales value of potential skim milk ice cream from goats / total sales value at splitoff) x joint processing costs 
Allocation to skim milk ice cream from goats = ($105,000 / $305,000) x $300,000 
Allocation to skim milk ice cream from goats = $103,279

Therefore, the cost per gallon of goat skim milk is $19.67 ($196,721 / 10,000 gallons) and the cost per gallon of skim milk ice cream from goats is $34.43 ($103,279 / 3,000 gallons).

Comparing the cost per gallon of the new product to its selling price, we can calculate the additional income that Morton would earn:

Additional income from skim milk ice cream from goats = (selling price per gallon - cost per gallon) x number of gallons 
Additional income from skim milk ice cream from goats = ($35 - $34.43) x 3,000 gallons 
Additional income from skim milk ice cream from goats = $1,710

Therefore, Morton would earn an additional income of $1,710 if it produced and sold skim milk ice cream from goats instead of goat skim milk.

How Much (If Any)extra Income Would Morton Earn If It