Question

Benson chicken corporation processes and packages chicken for grocery stores. it purchases chickens from farmers and processes them into two different products: chicken drumsticks and chicken steak. from a standard batch of 14,000 pounds of raw chicken that costs $7,450, the company produces two parts: 2,500 pounds of drumsticks and 4,500 pounds of breast for a processing cost of $2,466. the chicken breast is further processed into 3,700 pounds of steak for a processing cost of $1,700. the market price of drumsticks per pound is $1.40 and the market price per pound of chicken steak is $3.70. if benson decided to sell chicken breast instead of chicken steak, the price per pound would be $2.20.

a-1. Allocate the joint cost to the joint products, drumsticks and breasts, using weight as the allocation base.
a-2. Calculate the gross profit for each product.
a-3. If the drumsticks are producing a loss, should that product line be eliminated?
b-1. Reallocate the joint cost to the joint products, drumsticks and breasts, using relative market values as the allocation base.
b-2. Calculate the gross profit for each product.
c-1. Should Benson further process chicken breasts into chicken steak? (use the assumption made in requirement b-1).
c-2. How would the profit be affected by your answer in c-1?

Answer 1

The joint costs can be allocated to the joint products based on weight or relative market values. The gross profit for each product can be calculated by subtracting the processing cost from the market value multiplied by the weight. The decision to eliminate the drumsticks product line or further process chicken breasts into chicken steak depends on profitability and specific company goals.

Step-by-step explanation:

a-1. To allocate the joint cost to the joint products, drumsticks and breasts, we can use the weight of the products as the allocation base. The total weight of the products from the standard batch is 7,000 pounds (2,500 pounds of drumsticks + 4,500 pounds of breasts). To calculate the allocation, we can find the weight percentage of each product by dividing the weight of each product by the total weight and then apply that percentage to the total joint cost of $2,466.

a-2. The gross profit for each product can be calculated by subtracting the total processing cost of each product from the market value of each product multiplied by its weight.

a-3. Whether or not the drumsticks product line should be eliminated would depend on the specific financial goals and constraints of Benson chicken corporation. The profit or loss of the drumsticks product line would need to be compared to the overall profitability of the company and any potential strategic considerations.

b-1. To reallocate the joint cost to the joint products using relative market values as the allocation base, we need to determine the weight percentage of each product based on their relative market values. We can then allocate the joint cost by applying these weight percentages to the total joint cost.

b-2. The gross profit for each product can be calculated by subtracting the total processing cost of each product from the market value of each product multiplied by its weight.

c-1. Whether or not Benson should further process chicken breasts into chicken steak would depend on the profitability of chicken steak compared to chicken breasts. Based on the assumption made in requirement b-1, where the joint cost allocation is based on relative market values, we can consider the profitability of chicken steak in relation to chicken breasts.

c-2. The profit would be affected by Benson's decision to further process chicken breasts into chicken steak. If chicken steak is more profitable than chicken breasts, the profit would likely increase. However, if chicken steak is less profitable or incurs higher costs, the profit could decrease.