QUESTION 7 - Joint product costing (17 marks)

Arlington Co. produces three chemicals out of a common process; Chemical A, Chemical B and Chemical C. All products are sold at split-off. The company currently uses the physical measures method to allocate joint costs to these products. The following additional information is available:

Product LinePhysical Volume Unit Selling Price

Chemical A10,000 units$79.00

Chemical B12,000 units$36.50

Chemical C18,000 units$20.20

Joint costs for the company are $925,000.

The manager of the Chemical C 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 stated that his product is sold in a highly competitive market and increasing the price is not an option.

The manager of the Chemical A 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 Chemical B 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.Problem statement:

i.State the problem in this situation. Use the course case instructions to appropriately word the statement. (1 mark)

ii.Provide an explanation that further explain this problem. (3 marks)

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b.Provide a quantitative analysis that illustrates the issues you identified in part (a). (6 marks)

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

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