Question

Lovely Lotion Inc. produces three different lotions: hand, body, and foot. The lotions are produced jointly in a mixing process that costs a total of $250 per batch. At the split-off point, one batch produces 80, 40, and 25 bottles of hand, body, and foot lotion, respectively. After the split-off point, hand lotion is sold immediately for $2.50 per bottle. Body lotion is processed further at an additional cost of $0.25 per bottle and then sold for $5.75 per bottle. Foot lotion is processed further at an additional cost of $0.85 per bottle and then sold for $4.00 per bottle. Assume that body and foot lotion could be sold at the split-off point for $3.00 and $3.20 per bottle, respectively.

1. Using the market value at split-off method, allocate the joint costs of production to each product.
2. A lotion manufacturing company produces three types of lotions. After the split-off point the company continues to sell the body lotion and makes $0.25 profit per bottle. The foot lotion generates $0.05 loss per bottle. Which lotion should be continued after the split-off point?
A. Hand lotion.
B. Body lotion.
C. Foot lotion.
D. Body and foot lotion.
3. Allocate the joint costs of production to each product using the net realizable value method.

Answer 1

The joint costs of production can be allocated using the market value at split-off method by proportionally assigning costs based on each product's market value relative to the total. For continuity post split-off, only body lotion should be further processed due to its per unit profit. Another allocation method is based on net realizable values, considering post split-off costs and final sale prices.

Step-by-step explanation:

To allocate the joint costs of production using the market value at split-off method, one needs to consider the portion of the total market value at split-off that each product represents. Calculating these market values for hand, body, and foot lotions based on the given quantities and prices, we can allocate the $250 joint cost proportionally.

For the continuation decision post split-off, we should look at the incremental profit or loss. Since body lotion makes a profit of $0.25 per bottle after further processing and foot lotion results in a $0.05 loss per bottle, it is clear that only body lotion should be continued after the split-off point. Therefore, the answer is B. Body lotion.

Using the net realizable value method for allocating joint costs, we take the final sale price minus any additional costs incurred after the split-off point. Calculating net realizable values for each product can provide a different allocation of the joint costs compared to the market value method, potentially influencing product strategy and profitability analysis.

Answer 2

1) Hand lotion : Joint cost = $250

body lotion : joint cost = $250

foot lotion : Joint cost = $250

2) Body lotion

The joint costs of production for each product is : $250

Step-by-step explanation:

cost per batch = $250

At spit off point

one batch produces : 80 bottles of hand lotion, 40 body lotions, 25 foot lotion

After spit-off point : Hand lotion is $2.5 per bottle

cost of further processing of body lotion = $0.25

value of body lotion = $5.75

cost of further processing of foot lotion = $0.85

market value of foot lotion = $4.00

Assuming that body and foot lotion could be sold at the split-off point for $3.00 and $3.20 per bottle, respectively.

1 ) using the market value at split-off method to allocate the joint costs of production to each product

Hand lotion : Joint cost = $250

body lotion : joint cost = $250

foot lotion : Joint cost = $250

this is because the joint cost of producing each product in every batch is the same

2) The lotion that should be continued after split-off is

Body lotion because the market value after split-off - cost for further production is better off other lotions ( highest market value after split-off)

i.e : $5.75 - $0.25 = $ 5.50

The joint costs of production for each product is : $250