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 FINAL EXAM

Thursday, December 14 – 9:00 am to 12:00 pm

Section 570 = LH 101 Section 571 = LH 100

ADJUSTED: Will not include Week 13 (Dec 4) Topics.

7 questions – calculations, schedules, short written responses

NO MCQ

Similar to mid-term tests.

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 COURSE EVALUATIONS
Please take the first 10 minutes of class to complete
the course evaluation for MOS 3370.
Your feedback means a lot to me,
and helps me with developing future courses.
I would particularly appreciate knowing what aspects
of this course you found most helpful.
For example:
blended format; in-class problems & discussion; Excel problem files;
PDF problem files, recorded lectures; weekly hand-in problems;
two mid-term tests instead of one; tax assignments;
word of the week; etc.…

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JOINT PRODUCT COSTING

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Exercise 12-6
In a joint processing operation, Nolen Company manufactures three grades of sugar
from a common input, sugar cane. Joint processing costs up to the split-off point
total $80,000 per year. The company allocates these costs to the joint products on the
basis of their total sales value at the split-off point. These sales values are as follows:
raw sugar, $40,000; brown sugar, $40,000; and white sugar, $42,000.

Each product may be sold at the split-off point or processed further. Additional
processing requires no special facilities. The annual additional processing costs and
the sales value after further processing for each product are shown below:

Additional Sales
Product Processing Costs Value
Raw sugar $ 42,000 $ 80,000
Brown sugar $ 28,000 $ 70,000
White sugar $ 12,000 $ 82,000

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Required:
a. Compute the Incremental profit (loss) for each product.
b. Which product or products should be sold at the split-off point?
Brown White
Raw Sugar Sugar Sugar
Sales value after further processing .......... $80,000 $70,000 $82,000
Less sales value at split-off point...............
Incremental revenue ..........
Less cost of further processing .................
Incremental profit (loss) .....

Sales value at split off: raw sugar, $40,000; brown sugar, $40,000; and white sugar, $42,000.

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 Examples of Three Joint Costing Methods
Chassin Company produces three products after a common processing operation. The
joint process results in 200 units of A, 500 units of B, and 300 units of C. Both A and C
undergo further processing. Chassin has provided the following information:

These costs may be shown as:

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1. Treating C as a By-Product, and using either NRV or Physical Method for A & B
If C is a by-product, its existence is just an outcome of the purposeful production
of Products A & B. Therefore, we assign just enough joint costs to Product C to
leave it with zero profit. Then we can use either the NRV or Physical Method to
allocate the remaining joint product costs.
Product C: Total Sales Value = 300 units x $68
Less Costs after Split-Off
Amount of Joint Cost to Allocate to C

Remaining Joint Cost = $60,000 less $12,000 allocated to C = $48,000:

Allocate rest to A & B.

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Use the NRV method to allocate the remaining $48,000 to A & B:

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The Physical Method can also be used to allocate the remaining $48,000 to A & B:

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If we compare the Cost of Goods Manufactured with all of the methods, we will see that
each method fully allocates the $71,400 total product cost to the units produced.
However, each method gives considerable variance. Companies analyze their products
carefully when determining which method to use.

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Linear Programming

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Many firms face the problem of dealing with multiple products and
maximizing the use of multiple scarce resources. A quantitative tool called
Linear Programming can be used to derive a solution that offers a product
mix to optimize the use of these scarce resources.
Linear programming defines the situation in a series of mathematical
statements. The first statement sets an objective, called the Objective
Function. This is usually to maximize total contribution. Next we define
all other constraints.

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Example: Tarmac Company makes two products, A and B:
A has a unit contribution of $10 B has a unit contribution of $12
Both products use the same two manufacturing departments, Cutting and
Assembly. Tarmac's cutting department uses complex equipment with a maximum
capacity of 5,000 machine hours per month. The Assembly department has a
labour constraint of 12,000 labour hours per month.
Product A uses 1 machine hour and 4 labour hours per unit. Product B uses 3
machine hours and 2 labour hours per unit. Tarmac must fill minimum orders of
500 units of B.
Product A B Constraint
Contribution Margin $ 10 $ 12 A>0; B>0
Cutting Department 1 MH 3 MH <= 5,000 machine
hours
Assembly Department 4 DLH 2 DLH <= 12,000 labour
hours
Monthly Sales Minimum None 500 Units Must produce at least
500 units of B
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Use the following 5 steps to derive the product mix that will optimize the
contribution margin for these scarce resources:

Step 1: Determine the Objective Function

The objective function is to maximize the contribution margin and therefore is:
➔ Max CM = $10A + $12B

Step 2: Construct mathematical equations by using the given constraints

A > or = 0

B > or = 500

Cutting department constraint ➔ 1A + 3B = 5,000 (equation 1)

Assembly department constraint ➔ 4A + 2B = 12,000 (equation 2)

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Step 3: Solve for the point (product mix) which maximizes the contribution margin
To solve, multiply the first equation by 4, so that A can be eliminated through subtraction.
1A + 3B = 5,000 4A + 12B = 20,000
4A + 2B = 12,000 (4A + 2B = 12,000)
10B = 8,000
B = 800
This satisfies the minimum of 500 units.

Now plug B = 800 into both of the above equations to solve for A.
Using equation 1 ➔ A + 3(800) = 5,000
A + 2,400 = 5,000
A = 2,600 units
Using equation 2 ➔ 4A + 2(800) = 12,000
4A + 1,600 = 12,000
A = 2,600 units
The point at which the constraints are fully maximized is A = 2,600 units and B = 800 units.
Note that due to capacity constraints, the results may not always be the same in both
departments! You will see that when you look at Link Company
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Step 4: Graph a line for each constraint
When constructing a graph, we need to include a line for each of the equations.
Cutting department Line:
Using the equation for the cutting department derived above → 1A + 3B = 5,000 MH
Let A = 0 and therefore B = 5,000/3 = 1,667 MH ➔ (0; 1,667)
Let B = 0 and therefore A = 5,000 MH ➔ (5,000; 0)
We can now draw this line on a graph using these two points

Assembly department Line:

Using the equation for the assembly department derived above → 4A + 2B = 12,000 DLH
Let A = 0 and therefore B = 12,000/2 = 6,000 DLH ➔ (0; 6,000)
Let B = 0 and therefore A = 12,000/4 = 3,000 DLH ➔ (3,000; 0)
We can now draw a line on the graph using these two points

B > or = 500 Line:

Draw a vertical line on the graph where B = 500.

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B

6000

5500 Assembly Department: (3,000 A or 6,000 B)

5000

4500 Feasible Area: Any amount within this area

can be produced.
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The 4 corner points are: (0A, 500B); (2,750A, 500B); (2,600A, 800B); (0A, 1,667B)
3500

3000

2500

2000

1500 Cutting Department: (5,000 A or 1,667B) Optimal point: (2,600A, 800B)

This is the "northeast corner"
1000

500 B constraint >= 500 units

0
500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500
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Step 5: Use the Objective Function formula and the four corner points to determine the
contribution margin at each point:

Objective function from step 1 ➔ max CM = $10A + $12B

1) Could produce 0 units of A and 500 units of B (0A, 500B): CM =

$10(0) + $12(500) = $6,000

2) Could produce as many units as possible of A and 500 units of B (2,750A, 500B):
CM = $10(2,750) + $12(500) = $33,500

3) Could produce 2,600 units of A and 800 units of B (2,600A, 800B):

CM = $10(2,600) + $12(800) = $35,600

4) Could produce 0 units of A and the maximum possible units of B (0A, 1,667B):
CM = $10(0) + $12(1,667) = $20,004

The product mix which maximizes the CM is 2,600 units of A and 800 units of B.

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 Link Company
Link Company produces two models of connectors, Basic and Super. Both models are
manufactured totally in two departments: Forming, which has a total capacity of 240
labour-hours per month; and Finishing, which has a capacity of 480 labour-hours per
month. The unit labour requirements for each model are:
Basic Super
Forming Department 1.0 hour 0.8 hour

Finishing Department 0.5 hour 2.0 hour

The unit contribution of the Basic model is $4.00. For Super it is $5.00. The total
production of Basic can be sold, however only a monthly maximum of 200 units of Super
can be sold.
Required:
Use linear programming to determine how many of each type of connector should be
manufactured.

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