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The

Wood

Spirits Company produces two

productslong dashturpentine

and methanol (wood

alcohol)long dashby

a joint process. Joint costs amount to $125,000

per batch of output. Each batch totals

13,500

gallons: 25% methanol and 75% turpentine. Both products are processed further without gain or loss in volume. Separable processing costs are methanol,

$ 4

per gallon, and turpentine,

$ 2

per gallon. Methanol sells for

$ 22 per gallon. Turpentine sells for $ 16 per gallon.

Requirement 1. How much of the joint costs per batch will be allocated to turpentine and to methanol, assuming that joint costs are allocated based on the number of gallons at splitoff point?

	Methanol	Turpentine	Total
Physical measure of total production
Weighting
Joint costs allocated

Requirement 2. If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to turpentine and to methanol? (Round the weights to five decimal places.)

	Methanol	Turpentine	Total
Final sales value of total production
Deduct separable costs
NRV at splitoff point
Weighting
Joint costs allocated

Requirement 3. Prepare product-line income statements per batch for requirement 1 and 2. Assume no beginning or ending inventories. (For entries with a $0 balance, make sure to enter "0" in the appropriate column.)

Begin with the physical-measure method.

	Methanol	Turpentine	Total
Revenue
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Now show the operating income for both products using the NRV method.

	Methanol	Turpentine	Total
Revenue
Cost of goods sold
Joint costs
Separable costs
Total cost of goods sold
Gross margin

Requirement 4. The company has discovered an additional process by which the methanol (wood alcohol) can be made into apleasant-tasting alcoholic beverage. The selling price of this beverage would be $55

a gallon. Additional processing would increase separable costs

$ 12

per gallon (in addition to the

$ 4

per gallon separable cost required to yield methanol). The company would have to pay excise taxes of 20% on the selling price of the beverage. Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)? Should the company produce the alcoholic beverage? Show your computations.

Begin by calculating the joint cost applicable to the wood alcohol (using the NRV method). (Round the weights to five decimal places.)

	Alcohol Bev.	Turpentine	Total
Final sales value of total production
Deduct separable costs
NRV at splitoff point
Weighting
Joint costs allocated

To help you to determine if the company should produce the alcoholic beverage, complete the following table.

Incremental revenues
Incremental costs:
Added processing
Taxes
Incremental operating income (loss) from further processing

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