Joint Cost Allocation, processing further and ethics. Unified Chemical Company has a joint production process that converts Zeta into two chemicals: Alpha and Beta. The company purchases Zeta for $12
Joint Cost Allocation, processing further and ethics. Unified Chemical Company has a joint production process that converts Zeta into two chemicals: Alpha and Beta. The company purchases Zeta for $12 per pound and incurs a cost of $30 per pound to process it into Alpha and Beta. For every 10 pounds of Zeta, the company can produce 8 pounds of Alpha and 2 pounds of Beta. The selling price for Alpha and Beta are $76.50 and $144.00, respectively.
Unified Chemical generally processes Alpha and Beta further in separable processes to produce more refined products. Alpha is processed separately into Alphalite at a cost of $25.05 per pound. Beta is processed separately into Betalite at a cost of $112.80 per pound. Alphalite and Betalite sell for $105 and $285 per pound, respectively. In the most recent month, Unified Chemical purchased 15,000 pounds of Zeta.
The company had no beginning or ending inventory of Zeta.
1. Allocate the joint costs to Alphalite and Betalite under the following methods:
a. Sales value at splitoff
b. Physical measure (pounds)
c. Net realizable value
d. Constant gross margin percentage NRV
2. Unified Chemical is considering an opportunity to process Betalite further into a new product called Ultra-Betalite. The separable processing will cost $85 per pound and expects an additional $15 per pound packaging cost for Ultra-Betalite. The expected selling price would be $360 per pound. Should Unified Chemical sell Betalite or Ultra-Betalite? What selling price for Ultra-Betalite would make Unified Chemical indifferent between selling Betalite and Ultra-Betalite?
3. Independent of your answer to requirement (2), suppose Danny Dugard, the assistant controller, has completed an analysis that shows Ultra-Betalite should not be produced. Before presenting his results to top management, he received a visit from Sally Kemper. Sally had been personally responsible for developing Ultra-Betalite and was upset to learn that it would not be manufactured.
Sally: The company is making a big mistake by passing up this opportunity. Ultra-Betalite will be a big seller and will get us into new markets.
Danny: But the analysis shows that we would be losing money on every pound of Ultra-Betalite we manufacture.
Sally: But that is a temporary problem. Eventually the cost of processing will be reduced.
Danny: Do you have any estimates on the cost reductions you expect?
Sally: There is no way of knowing that right now. Can’t you just fudge the numbers a little to help me get approval to produce Ultra-Betalite. I am confident that cost reductions will follow.
Comment on the ethical issues in this scenario. What should Danny do?