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Hi Sir,
I have gone over this question a number of times and I cant seem to figure out how the Gross Profit was allocated instead of being charged full to the product:
2 products A and B are produced in a process. Data for the process for the last period are as follows:
Product A:(sales 480 tonnes) (production 600 tonnes)
Product B: (sales 320 tonnes) (production 400 tonnes)Common production costs in a period were $12000. There was no opening inventory. Both products had a gross profit margin 40%. Common production costs were apportioned on a physical basis.
What was the gross profit for product A in the period?
A $2304
B $2880
C $3840
D $4800The correct answer is C
I have been able to calculate cost for product A by ( 600/1000 tonnes X $12000 = $7200) and then I multiplied 7200x 480/600 to get the cost of 5760. To get the gross profit I multiplied 5760*40/100 which would have given me A- 2304. But my answer is wrong as the explanation for the Gross profit is to multiply it by 40/60*5760 which yields C. But I don’t understand why. Would you be able to assist me please?
For every $100 of sales, the profit is $40 and therefore the cost is $60.
Putting it the other way round, for every $60 cost, the profit will be $40 (and therefore the selling price will be $100).
So for cost of 5,760, the profit will be 40/60 x 5,760.
Thank you sir. Appreciate your prompt response and your explanation, I get it now.
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