Perfume Company (Joint costs; change in product mix)
The Laissez Faire Perfume Company processes a secret blend of flower petals into three products. The process works in such a way that the petals are broken down into a high-grade perfume, Charm, and a low-grade flower oil. The flower oil is then processed into a low-grade perfume, Wild Scent, and a cologne, Personally.
The company used 10,000 pounds of petals last month. The costs involved in reducing the petals into Charm and flower oil were:
The cost of producing Wild Scent and Personally from the flower oil were:
Total production for the month, with no ending work-in-process inventory, was:
The sales price of Charm is $40 an ounce; of Wild Scent, $10 an ounce; and of Personally, $1 an ounce.
Additional costs, entirely separate for each product, of processing and selling are:
1. Determine the joint costs of Charm, Wild Scent, and Personally, using the estimated net realizable value method. 2. Show the operating income by product line, assuming no beginning or ending inventories. 3. The management, completely ignorant of cost accounting, is considering the possibility of increasing the quality of Wild Scent, at an increase in final processing cost of $2 per ounce. The selling price would increase to $12 per ounce. This decision would result in a different product mix of Wild Scent and Personally. Every 10,000 pounds of petals would then result in 10,000 ounces of Charm, 18,000 ounces of Wild Scent, and 60,000 ounces of Personally. The separable costs of Personally and Wild Scent are completely variable. All prices and...
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