Methods of joint-cost allocation, ending inventory. Garden Labs produces a drug used for the treatment of arthritis. The drug is produced in batches. Chemicals costing $50,000 are mixed and heated, then a unique separation process extracts the drug from the mixture. A batch yields a total of 3,000 gallons of the chemicals. The first 2,500 gallons are sold for human use while the last 500 gallons, which contain impurities, are sold to veterinarians. The costs of mixing, heating, and extracting the drug amount to $155,000 per batch. The output sold for human use is pasteurized at a total cost of $130,000 and is sold for $600 per gallon. The product sold to veterinarians is irradiated at a cost of $20 per gallon and is sold for $450 per gallon. In March, Garden, which had no opening inventory, processed one batch of chemicals. It sold 2,000 gallons of product for human use and 300 gallons of the veterinarian product. Garden uses the net realizable value method for allocating joint production costs.
1. How much in joint costs does Garden allocate to each product?
2. Compute the cost of ending inventory for each of Garden’s products.
3. If Garden were to use the constant gross-margin percentage NRV method instead, how would it allocate its joint costs?
4. Calculate the gross margin on the sale of the product for human use in March under the constant gross-margin percentage NRV method.
5. Suppose that the separation process also yields 300 pints of a toxic byproduct. Garden currently pays a hauling company $6,000 to dispose of this byproduct. Garden is contacted by a firm interested in purchasing a modified form of this byproduct for a total price of $7,000. Garden estimates that it will cost about $35 per pint to do the required modification. Should Garden accept the offer?