Hudziak Industries has two separate profit centres: Chemicals and Cosmetics. The firm acquires its major ingredient for both divisions jointly. Currently, this material is purchased in 1,000-kg lots for $2,000. The material is passed through an exclusive separator process. After separation, Chemicals receives 300 L of chemical J-52A, and Cosmetics receives 200 kg of quitoban. The Chemicals division must process chemical J-52A further before it can be sold. Additional processing costs $150 per lot, and the chemical is then sold for $5/L. The Cosmetics division bottles and packages quitoban as an antiperspirant at a cost of $250 per lot. The antiperspirant is sold for $7/kg.

REQUIRED:

INFORMATION ANALYSIS:

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.

A. Determine the income per lot that each division would report if joint costs were allocated on a net realizable value basis.

B. Hudziak has the opportunity to buy higher-quality lots of raw materials for $3,000. Some questions have been raised about the health effects of certain ingredients in antiperspirants, and the higher-quality raw material does not contain any of these ingredients. If Hudziak buys the new material, Chemical’s processing costs will increase to $400 per lot, but the selling price of its product will remain the same. Cosmetics’ selling price will increase to $15/kg, and its separable costs will remain the same. Managers provide input to the decision-making process for such decisions, but the president of the firm makes the final decision.

1. If you were the manager of Chemicals, would you want the firm to buy the higher-quality material? Show your calculations, and explain your position.

2. If you were the manager of Cosmetics, would you want the firm to buy the higher-quality material? Show your calculations, and explain your position.

3. Describe the pros and cons to the company as a whole from purchasing the higher-quality material.

C. Explain why top management faces uncertainties about how to handle situations such as the purchase described in Part B.

D. What methods can be used to encourage managers who have conflicting interests to take actions that are in the best interests of the company as a whole?

E. What are the advantages and disadvantages of the methods you identified in Part D?

WRITTEN ASSIGNMENT:

Suppose you are the cost accountant for Hudziak Industries. Turn in your answers to the following.

F. Write a memo to the president, recommending a decision for the purchase described in Part B. Attach to the memo a schedule showing your computations. As appropriate, refer to the schedule in the memo.

G. Include in your memo for Part F your recommendations for avoiding potential conflicts for similar types of future decisions in a way that is fair to both managers.