(Net realizable value allocation) Star Communications is a regional television net¬ work. The firm has three service groups: Sports, News, and Entertainment. Joint production costs (costs incurred for facilities, administration, and so forth) for May 1997 were $16,000,000. The revenues and separate production costs of each group for May follow:

a. What amounts of joint cost are allocated to each service group using the net realizable value approach? Compute the profit for each group after the allocation.

b. What amount of joint cost is allocated to each service group if the allocation is based on revenues? Compute the profit for each group after the allocation.

c. Assume you are head of the Sports Group. Would the difference in allocation bases create significant problems for you when you report to Star Commu¬ nications’ Board of Directors? Develop a short presentation to make to the board if the allocation base in part b is used to determine group relative profitability. Be certain to discuss important differences in revenues and cost figures between the Sports and Entertainment Groups.LO1

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Revenues Separate costs SPORTS $18,000,000 17,000,000 NEWS $15,000,000 8,000,000 ENTERTAINMENT $95,000,000 55,000,000