Question

If all of the joint products are sold at the split-off point and an overall profit is made on all of the products, which one of the following joint costing methods will result in the same gross margin percentage on each joint product?

a) Weighted average cost
b) Market value method
c) Estimated net realizable value method
d) Constant gross margin percentage method

Answer 1

The constant gross margin percentage method is the joint costing method that ensures each joint product has the same gross margin percentage when sold at the split-off point.

Step-by-step explanation:

The joint costing method that will result in the same gross margin percentage on each joint product when all of the joint products are sold at the split-off point and an overall profit is made on all of the products is the constant gross margin percentage method. This method allocates joint costs based on the constant gross margin percentage that each product must achieve. Unlike other methods such as weighted average cost, market value method, or estimated net realizable value method, the constant gross margin percentage method ensures that each product contributes equally to the overall gross margin percentage of the firm.

Analyzing a firm's cost structure includes understanding fixed and variable costs, average total cost, average variable cost, marginal cost, and how these factors affect decisions on the profit-maximizing quantity and price. Specifically, companies must comprehend the concept of economies of scale, diseconomies of scale, and other cost-related definitions to properly calculate profits and make strategic business decisions.

Answer 2

If all of the joint products are sold at the split-off point and an overall profit is made on all of the products, Constant gross margin percentage method joint costing methods will result in the same gross margin percentage on each joint product, so option D is correct.

Step-by-step explanation:

To understand which costing method will result in the same gross margin percentage on each joint product, we first need to define what each method means:

a) Weighted Average Cost Method: This method allocates joint costs to products based on a weighted average, often considering physical measures like weight, volume, or units.

b) Market Value Method: This allocates joint costs based on the relative market value of each joint product at the split-off point.

c) Estimated Net Realizable Value Method: This method bases the allocation on the estimated final market value of each product, less any costs that will be incurred after the split-off point.

d) Constant Gross Margin Percentage Method: This method applies the costs to ensure that each joint product has the same gross margin percentage.

Now, let's consider what the question is asking. The gross margin percentage is the percentage of each sales dollar remaining after the company pays for the goods it sold (cost of goods sold).

To have the same gross margin percentage on each joint product, the method of allocation must apportion costs in such a way that the ratio of gross profit to sales is consistent across products.

The Constant Gross Margin Percentage Method is designed to achieve exactly this. By using this method, the joint costs are allocated in a manner that equalizes the gross margin percentage across all products.

The other methods do not necessarily result in the same gross margin percentage for each product because they allocate costs based on other factors, like weight, market value, or net realizable value, which could result in different gross margins for different products.

Therefore, the correct answer to the question is:

d) Constant Gross Margin Percentage Method

This method ensures that the gross margin percentage is the same for each joint product after the allocation of joint costs.