Nellie Tompkins is the owner and operator of Tompkins' Salsa Inc., a salsa production unit. She makes and sells only three types of salsa--peach, pear, and pineapple
The joint costs of leasing her professional kitchen for manufacture, transport, insurance, and so on are allocated on an equal basis to the three types of salsas. Last year's sales figures and allocated joint costs are given below. Should Tompkins' Salsa Inc. stop selling its pear salsa? Why or why not?
Pear Salsa Peach Salsa Pineapple Salsa
Sales $4,000 $8,000 $9,000
Less Cost of Goods Sold 5,000 5,000 5,000
Gross Margin ($1,000) $3,000 $4,000
What will be an ideal response?
ANSWER: Tompkins' Salsa Inc. should continue to produce and sell all three types of salsas. An investigation of overall figures shows that a $6,000 profit was earned on the three items in the line:
Pear Salsa Peach Salsa Pineapple Salsa
Sales $4,000 $8,000 $9,000
Less Cost of Goods Sold 5,000 5,000 5,000
Gross Margin ($1,000) $3,000 $4,000
The pear salsa should not be dropped just because it is currently showing a loss.It should also be noted that weight may not be the right way to allocate joint costs. Other allocation bases that may be used include market value or quantity sold.
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