A Company Produces Two Products, X and Y, from a Single

question 160

Essay

A company produces two products, X and Y, from a single raw material called ZZ. ZZ is purchased in 55-gallon drums, and the contents of one drum are sufficient to produce 30 gallons of X and 15 gallons of Y. X sells for $10.00 per gallon and Y sells for $30.00 per gallon. During the current period, the company used 400 drums of ZZ to produce X and Y. The cost of ZZ was $90 per drum.
Required:
(1) If the cost of ZZ is allocated to the X and Y products on the basis of the number of gallons produced, how much of the total cost of the 400 drums should be charged to each product?
(2) If the cost of ZZ is allocated to the X and Y products in proportion to their market values, how much of the total cost of the 400 drums should be charged to each product?
(3) Which basis of allocating the cost is most likely to be used by the company?
Check one and briefly explain.
_________ The relative number of gallons of each product produced.
_________ The relative market values of each product at the point of separation.

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Definitions:

Linear Programming

A mathematical method for determining a way to achieve the best outcome, such as maximum profit or lowest cost, in a given mathematical model for some list of requirements represented as linear relationships.

Open System

An entity or process that interacts with its environment by exchanging information, material, or energy.

Outputs

The ultimate outputs, whether products, services or outcomes, produced by a system, process, or organization.

Supplies

Materials, equipment, or other items required for the operation of a business or the completion of a task.