Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 8

Joint Cost Allocation and Product Profitability
Western Woods, Inc., processes logs into grade A and grade B lumber. Logs cost $15,000 per load. The milling process produces 5,000 units of grade A with a market value of $35,000, and 15,000 units of grade B with a market value of $5,000. The cost of the milling process is $6,400 per load.
Required
a. If the costs of the logs and the milling process are allocated on the basis of units of output, what cost will be assigned to each product
b. If the costs of the logs and the milling process are allocated on the basis of the net realizable value, what cost will be assigned to each product
c. How much profit or loss does the grade B lumber provide using the data in this problem and your analysis in requirement ( a ) Is it really possible to determine which product is more profitable Explain why or why not.