Accounting for a byproduct. Sunny Day Juice Company produces oranges from various organic growers in Florida. The juice is extracted from the oranges and the pulp and peel remain. Sunny Day considers the pulp and peel byproducts of its juice production and can sell them to a local farmer for $2.00 per pound.
During the most recent month, Sunny Day purchased 4,000 pounds of oranges and produced 1,500 gallons of juice and 900 pounds of pulp and peel at a joint cost of $7,200. The selling price for a half-gallon of orange juice is $2.50. Sunny Day sold 2,800 half-gallons of juice and 860 pounds of pulp and peel during the most recent month. The company had no beginning inventories.
Required
1. Assuming Sunny Day accounts for the byproduct using the production method, what is the inventoriable cost for each product and Sunny Day’s gross margin?
2. Assuming Sunny Day accounts for the byproduct using the sales method, what is the inventoriable cost for each product and Sunny Day’s gross margin?
3. Discuss the difference between the two methods of accounting for byproducts.