21. (Net realizable value allocation) Galaxy Communications is a broadband network and television company. The firm has three service groups: Communications, News, and Entertainment. Joint production costs (costs incurred for facilities, administration, and other) for May 2000 were $12,000,000. The revenues and separate production costs of each group for May follow:

Communications News Entertainment Revenues $18,000,000 $15,000,000 $95,000,000 Separate costs 17,000,000 8,000,000 55,000,000

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 Communications Group. Would the difference in allocation bases create significant problems for you when you report to Galaxy Communications’ 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 Communications and Entertainment groups.