Gross Margin Percent

Topics: Gross margin, Price, Units of measurement Pages: 7 (1640 words) Published: March 18, 2011
Unitron CorporationThe RSV method has a number of twists that
can result in many different unit costs for the five
Question 1products. For inventory costing purposes, any
The idea here is to construct a "Producedsystematic cost allocation system will do. The basic As/Sold As Matrix" (400,000 x 400,000). Obviously,idea of the relative sales value scheme is that all sales the possible combinations are endless, so how does oneshould show gross margin percent equal to the average choose a "best" approach? The "best" solution is togross margin percent across the full joint product set. start with demand for the highest value product (405)This average is 19% [(246 - 200) (246)]. This does and work back unsold production to the next lowestimply 5 different costs for the 5 different products, value product (404) to fill sales demand, and so forthbased on the 5 different selling prices. As long as no until 401 sales demand is filled (see Exhibit A).product switching occurs, the basic idea is easily

The idea is to minimize potential revenue loss.preserved. Note here that the relevant designation for a In a static sense [$246,000 Revenue], any tableau is asproduct is the sales designation. Anything sold as a good as any other. But, in a dynamic sense, future401 will carry 401 cost. revenue is always unknown. In that sense, the firmHere are the resulting unit cost numbers: minimizes potential loss by only trading down one

level.Unit Costs
Since some substitution is necessary anyway,Physical units method $0.50 $0.50 $0.50 $0.50 there is no reason to try to avoid it. Half the 405's$0.50 produced will be sold as 404's, and two thirds of theRelative sales value method 404's produced will be sold as 403's, and so on down[Sales price x (1-.19)] the line. Thus, in economic terms, only the "sold as"$0.40 x 0.81.32 numbers have meaning.$0.60 x 0.81.49

$0.80 x 0.81.57 $0.80 x 0.81.65 $1.00 x 0.81.81
Question 3
Costing Method Relative
Physical UnitRel. Sales Value
Question 2($.40/unit x 6,000 units)$2,400$2,400
There are two basic accounting methods forCosts:
allocating joint cost to the five joint products: the($.50/unit x 6,000 units) 3,000 Method A: 3000 x .32 "physical units" or "average cost" method, and the3000 x .492,430 "relative sales value" (RSV) or "net realizable value"Method B: 2400 x .811,944 (NRV) method. Question 1 says the period began withGross Margin$(600)Method A:$(30) zero inventories. The objective is to assign the jointMethod B:$456 cost to the 400,000 units produced and for which we

have sales demand information.A problem arises under RSV costing when
The physical units method is straightforward:there is product switching (402's sold as 401's). Now, joint cost of $200,000 divided by 400,000 total unitsthere is a choice: produced = $0.50 per unit. All rectifiers are assigned

identical unit costs. Since sales prices increase with1.Stay with the 5 different costing numbers, which increasing technical attributes across the fivemeans the 402's sold as 401's still carry 402 costs. categories, gross margins will also increase from theThe result, however, is consistent application of the low to high end products (negative 25% for 401 to 50%rule and violation of the basic idea . For sales of for 405).$2400 (6000 401's) the basic idea is clear-

The case says that no production costs arereported gross margin should be 19% or $456, assigned to the by-product. This is one alternative forsince 19% is the average gross margin percent, and dealing with by-products. We also assume here thatthis is a normal sale. any revenue from by-product sales is credited to

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