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Chapter 25: Q25-25RQ (page 1407)

What are joint costs? How do they affect the sell or process further decision?

Short Answer

Expert verified

Answer

The joint costs do not affect the sale or process of further decisions of a business concern.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Cost

In accounting, the term cost denotes the amount of money spent by a business concerned in the exchange or acquisition of goods or services. Costs are deducted from the revenues to compute thenet income generated by a business during a particular period.

02

Meaning of joint costs and their impact

Joint costs refer to those costs the benefit of which cannot be separated or are shown in a combined manner. In other terms, it is the expenses that a business entity incurs but the same benefits for more than one product, and the associated contribution to each product is not separable.

Joint costs do not impact the sale or processing it further decisions because expenses remain the same in both cases if joint costs are sunk in such a situation.

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Most popular questions from this chapter

Each morning, Max Smith stocks the drink case at Max’s Beach Hut in Myrtle Beach, South Carolina. The drink case has 120 linear feet of refrigerated drink space. Each linear foot can hold either six 12-ounce cans or three 20-ounce bottles.

Max’s Beach Hut sells three types of cold drinks:

1. Licious-Ade in 12-oz. cans for \(1.40 per can

2. Licious-Ade in 20-oz. bottles for \)1.90 per bottle

3. Pep-Cola in 20-oz. bottles for \(2.20 per bottle

Max’s Beach Hut pays its suppliers:

1. \)0.20 per 12-oz. can of Licious-Ade

2. \(0.35 per 20-oz. bottle of Licious-Ade

3. \)0.55 per 20-oz. bottle of Pep-Cola

Max’s Beach Hut’s monthly fixed costs include:

Hut rental \(355

Refrigerator rental 65

Max’s salary 1,700

Total fixed costs \)2,120

Max’s Beach Hut can sell all the drinks stocked in the display case each morning.

Requirements

1. What is Max’s Beach Hut’s constraining factor? What should Max stock to maximize profits?

2. Suppose Max’s Beach Hut refuses to devote more than 80 linear feet to any individual product. Under this condition, how many linear feet of each drink should Max’s stock? How many units of each product will be available for sale each day?

What is the decision rule for selling a product as is or processing it further?

What are sunk costs? Give an example.

Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.

Oak Petroleum has spent \(202,000 to refine 63,000 gallons of petroleum distillate, which can be sold for \)6.00 per gallon. Alternatively, Oak can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Oak must pay a sales commission of \(0.12 per gallon and a transportation charge of \)0.19 per gallon.

Requirements

1. Diagram Oak’s decision alternatives, using Exhibit 25-18 as a guide.

2. Identify the sunk cost. Is the sunk cost relevant to Oak’s decision?

3. Should Oak sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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