Imperial Mining is a coal company that produces three grades of coal—High, Medium, and Low—in fixed proportions. The joint costs of mining total $1,500,000. In a typical month, the company will mine 20,000 tons of High-Grade, 30,000 tons of Medium-Grade, and 10,000 tons of Low-Grade coal. Market prices have been relatively stable at $60 per ton for High-Grade, $40 per ton for Medium-Grade, and $10 per ton for Low-Grade. There are no costs to refine the individual grades of coal once it is mined.

Required
a. What is the reported profitability for each grade assuming the physical quantities method is used to allocate the joint cost of production?
b. What is the reported profitability for each grade assuming the net realizable value method is used to allocate the joint cost of production?
c. The marketing manager for the Medium-Grade coal comes to you and says that the company is under tremendous price pressure in that market. He asks what allocation method would show the lowest cost for Medium-Grade coal. He also asks whether treating the Low-Grade coal as a by-product would make a difference.

1. What combination of allocation method and classification of Low-Grade coal would result in the lowest reported costs for Medium-Grade coal?

2. Would you recommend the company adopt the method you identify? Explain.