Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 47

Joint Products and By-Products

Goodson Pharmaceutical Company manufactures three main prod­ucts from a joint process: Altox, Lorex, and Hycol. Data regarding these products for the fiscal year ended May 31, 2010, follow:

	Altox	Lorex	Hycol
Units produced	170,000	500,000	330,000
Sales value per unit at split-off	$ 3.50	—	$ 2.00
Allocation of joint costs*	$450,000	$ 846,000	$504,000
Separable costs	—	$1,400,000	—
Final sales value per unit	—	$ 5.00	—

* Joint costs are allocated on the basis of net realizable value, and the net realizable value of any by-product is deducted from the joint costs before allocation.

?Altox is currently sold at the split-off point to a vitamin manufacturer. Lorex is processed further after the split-off point and sold as a cold remedy. Hycol, an oil produced from the joint process, is sold at the split-off point to a cosmetics manufacturer.

?Arlene Franklin, president of Goodson, is reviewing opportunities to change the processing and sale of these three products. Altox can be refined for use as a high blood pressure medication, but this would result in a loss of 20,000 units. The costs to further process Altox are estimated to be $250,000 annually. The medication would sell for $5.50 per unit. The company has an offer from another phar­maceutical company to purchase Lorex at the split-off point for $2.25 per unit. Goodson's research department has suggested that the company process Hycol further and sell it as an ointment to relieve muscle pain. The additional processing would cost $75,000 annually and would increase the units of product by 25 percent. The product would be sold for $1.80 per unit.

?The joint process that Goodson currently uses also produces 50,000 units of Dorzine, a hazardous chemical waste product that costs the company $0.35 per unit for proper disposal. Dietriech Mills Inc. is interested in using the Dorzine as a solvent; however, Goodson must refine the Dorzine at an annual cost of $43,000. Dietriech would purchase all Dorzine Goodson can refine and is willing to pay $0.75 for each unit.

Required

1. Which of the three main products should Goodson Pharmaceutical Company sell at the split-off point? Which of the products should the company process further to maximize profits? Support your answers with appropriate calculations, using a spreadsheet system.

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2. Assume that Goodson has decided to refine the waste product Dorzine as a by-product of the joint proc­ess in the future and to sell it to Dietriech Mill.

?a. Did Goodson make the correct decision regarding Dorzine? Support your answer with appropriate calculations.

?b. Explain whether the decision to treat Dorzine as a by-product will affect your answer to requirement 1.

Step 1 of 6

Joint product and by-product costing:

Joint product is a result of a single input or single set of inputs processed in a single production process. The multiple products have substantial commercial value in comparison to each other. In joint product costing the cost is to be identified up to split-off point and it should designate a proper method for allocating such cost among 2 or more products. Further, if a specific cost is associated with a particular product it should be allocated to such product only.