Lafayette Co. produces three products out of a common process; Product L, Product M, and Product N. The company currently uses the physical measures method to allocate joint costs to these products. The following additional information is available:

Product LinePhysical VolumeUnit Selling Price

Product L10,000 units$79.20

Product M12,000 units$36.00

Product N18,000 units$20.00

Joint costs to produce the products are $950,000.

The manager of the Product N product line is particularly disgruntled. He believes that his product line is allocated a disproportionate share of joint costs. In a recent managers' meeting, he argued that the company should consider using sales value at splitoff as the joint cost allocation method. He stated that his product is sold in a highly competitive market and increasing price is not an option.

The manager of the Product L product line disagreed strongly. He stated that all products are sold in a competitive marketplace and that allocating joint costs on physical measures was simple and easily verifiable. The manager of the Product M product line sat quietly through the meeting and she did not seem to favour one method over the other.

As the assistant controller, you were asked by the controller to investigate the concerns of the product line managers.

Required:

a. Provide a quantitative analysis that illustrates the issues identified by the manager of Product N and the manager of Product L. (6 marks)

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b. Explain to the controller the main issue(s) in this situation. Use pertinent data from your quantitative analysis. (4 marks)

c. State your recommendation for a solution to this situation. Explain why you believe this is the best way to solve this situation. (3 marks)