Why Costs Are Allocated:The Hatfields and the McCoys own two adjacent tracts of land. Each tract has a surface area of 5,000 acres. During a recent shoot-out, crude oil came bubbling to the surface where a bullet had entered the ground. A petroleum geologist determined that there was an underground rock formation which contained a substantial amount of oil and which extended under both tracts of land. The formation was estimated at 600,000 acre feet of volume, of which 200,000 acre feet was under the McCoy's tract of land.

The Hatfields and the McCoys received an offer to buy the mineral rights for $4.5 million provided that they can agree on how much of the purchase price should be allocated to each family.

a. As a Hatfield, what basis would you recommend for allocating the purchase price? What arguments would you use to support your claim?

b. As a McCoy, what basis would you recommend for allocating the purchase price? What arguments would you use to support your claim?