Leonard’s Orchard growscherries. In July, as the cherries are picked, they aresorted into grades. They sell the Grade A cherries at theirroadside stand for $5 per kilogram. Grade B cherries canalso be sold at the roadside stand but they sell for only $3 perkilogram. Leonard also has a canning and freezingfacility at his orchard so that he can process the cherries furthershould he wish.
Each batch of 1,000 kg of cherriesthat are picked yields the following quantities:
| Quantity |
Grade A Cherries | 700 kg |
Grade B Cherries | 300 kg |
Each batch of 1,000 kg of cherries costs $500 to grow andpick.
Leonard is considering processing all of the Grade A cherriesinto Frozen Cherries. This will cost an additional $200but he will be able to sell 700 kg of Frozen Cherries for $5,000 intotal. He is also considering processing all of theGrade B cherries into Canned Cherry PieFilling. This processing will cost $400 but hewill be able to sell 300 kg of Canned Cherry Pie Filling for $1,200in total.
- Allocate the $500 in joint processing costs to the Grade A andGrade B cherries using the Sales Value at the split offmethod.
- Allocate the $500 in joint processing costs to the Grade A andGrade B cherries using the NRV method.
- Which product should he process further? Grade Acherries into Frozen Cherries or Grade B into Canned Cherry PieFilling? Why or why not?
- A researcher regularly buys the cherry pits (a by-product) fromLeonard’s Orchard for $80/kg. During the year, 600 kg ofcherry pits were saved in the processing of cherries and 250 kg ofcherries were sold to the researcher.
- If Leonard uses the Production Method of accounting forby-products, what is the value of the ending inventory of CherryPits?
- If Leonard uses the Sales method of accounting for by-products,how will the sale of cherry pits affect the Income Statement duringthe year?
