(Physical measure allocation) Michigan Timber uses a joint process to manufacture two grades of wood: A and B. During October 2010, the company incurred $12,000,000 of joint production cost in producing 18,000,000 board feet of Grade A and 6,000,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet of lumber produced. The company can sell Grade A lumber at the split off point for $0.80 per board foot. Alternatively, Grade A lumber can be further processed at a cost of $0.75 per board foot and then sold for $1.90 per board foot. No opportunity exists for processing Grade B lumber after split off .
a. How much joint cost should be allocated to Grade A and to Grade B lumber?
b. If Grade A lumber is processed further and then sold, what is the incremental effect on Michigan Timber’s net income? Should the additional processing be performed?