[Rhunter]

Studying the Kindle version of 2016 BEC Wiley Study Guide. Module 46, Question 48.

Joint Costs – If one joint product market value goes up and everything else stays the same, how is gross margin affected?

I answered that GM for both products increase; less costs go to product Q (obviously), while the additional costs allocated to product P go up proportionately.

The explanation in the book states that “if the market value at split-off (sales value of joint product P increases, then a larger proportion of the total joint costs will be allocated to that product. Because all other costs and selling prices remain unchanged, the gross margin of product p will, therefore, decrease.”

I put numbers to the scenario, and I’ve found that it’s not mathematically possible to get gross margin (or GM%) to decrease when increasing the sales value of product P at split-off. It seems like Wiley is completely ignoring the extra earnings from increasing the sale price.

Thoughts?