Nedved Labs produces a drug used for the treatment of hypertension. Chemicals are mixed and heated, creating a reaction; a unique separation process then extracts the drug from the mixture. A batch yields a total of 25 gallons: 5 gallons of which are sold to veterinarians and 20 gallons of which are sold for human use.
The costs of mixing, heating, and extracting the drug amount to $1,500 per batch. The output sold for human use is pasteurized at a cost of $1,200 and is sold for $585 per gallon. The product sold to veterinarians is irradiated at a cost of $50 and is sold for $410 per gallon.
In March, Nedved, which had no opening inventory, processed one batch of chemicals. It sold 17 gallons of product for human use and 3 gallons of the veterinarian product. Nedved uses the net realizable value method for allocating joint production costs.
How much in joint costs will NedVed allocate to each product?
- Compute gross margins (dollars and percentages) for each product.
- If Nedved were to use the constant gross margin method, what would the gross margin percentage be for each product?
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- How much in joint costs will NedVed allocate to each product?
| Human | Animal | |
| Total Sales Values
(20G*$585; 5G*$410) |
$11,700 |
$2,050 |
| Less separable costs | (1,200) | (50) |
| Net Realizable Value | 10,500 | 2,000 |
| Weights:
(10,500/12,500; 2,000/12,500) |
.84 |
.16 |
| Joint Costs Allocated
($1,500*.84; $1,500*.16) |
$1,260 |
$240 |
| Cost per Gallon
(1,260+1,200)/20G (240+50)/5G |
$123 per gallon |
$58 per gallon |
- Compute gross margins (dollars and percentages) for each product.
| Human | Animal | |
| Sales ($585 * 17G) ($410 * 3G) | 9,945 | 1,230 |
| COGS: Joint costs | 1,260 | 240 |
| Separable costs | 1,200 | 50 |
| Less EI: ($123 * 3G; $58 * 2G) | (369) | (116) |
| Total COGS | 2,091 | 174 |
| Gross Margin | 7,854 | 1,056 |
| Gross Margin % | 79% | 86% |
- If Nedved were to use the constant gross margin method, what would the gross margin percentage be for each product?
Total Sales Values ($585 * 20G) + ($410 * 5G) = 13,750
Less: Joint Costs (1,500)
Separable costs ($1,200 + $50) (1,250)
Gross Margin $11,000
GM % ($11,000 / $13,750 80%
