The Memory Manufacturing Company (MMC) produces and markets many different kinds of memory modules for use in the computer industry for high, medium and low- priced end products. Manufacturing processes for high technology products have advanced tremendously over the past several years. Memory chips, the major component of memory modules, result from a single process. Although identical in composition, the chips are separated, through testing, into various grades according to their density and speed. Since the different grades are produced simultaneously, only the total c ost of the process, and not that of the individual chips, is known. The cost incurred for any specific chip cannot be separately traced. The "average cost technique," (total process cost divided by number of good chips) used for the much simpler chips produced by earlier generations of manufacturing processes, no longer provides a satisfactory cost allocation if consideration is given to the density, speed, reliability, and the relative market value of the individual chips. Of the two grades of chips mentioned in this case, "standard" chips are worth far less in the market than "deluxe" chips. These differences in value, however, are masked in the chip manufacturing process.

The Manufacturing Process Memory modules are the output from two basic manufacturing processes: chip fabrication and module assembly /testing. A raw silicon wafer is the input in the chip fabrication process. Each wafer yields multiple chips. After as many as 200 different manufacturing operations during chip fabrication, the finished chips are ready for testing. The finished chips are tested and classified according to their density (the number of good memory bits on each chip) and their speed (the time required to access the good bits). The chip testing process can determine density and speed only. Reliability is determined when the completed module assembly is tested. The cost of the chips amounts to approximately 80 percent of the cost of the completed module. Chips of various densities and speeds are the input to the module assembly process where they go through a series of separable manufacturing operations (cost can be identified at each module assembly operation and for each part number). The output of the module assembly process, as determined by the final module test, consists of memory modules of quality that varies along a number of different dimensions. The dimensions include number of chips per module, chip density, chip speed, and reliability. A simplified flow diagram of the manufacturing processes for memory modules is shown in Figure 16A-1. For the purposes of the case study, two memory modules that command different prices in the market place are considered. The two memory modules are referred to as "standard" and "deluxe." Exhibit 16-Al shows the production quantity and cost data for a batch of memory modules. Exhibit 16-A2 describes the product characteristics.

Required 1. Should MMC account for the standard module as a by-product or as a joint product?

Exhibit 16-A2 Description of Memory Modules Minimum Product Characteristics Density Speed Reliability of Module Memory Products (Bits) (Nano Seconds) (Power on Hours) Deluxe module 1hi-density Fast Long life (1,000 bits) 150 nano secs. 100K hours 2 lo-density (500 bits) Standard module 1lo-density Slow Short life (500 bits) 200 nano secs. 80K hours A Deluxe module Contains 1000bits (1 hi-density or 210-density chips), with 150 nano seconds speed, and is rated for 100K power on hours. A Standard module Contains 500 bits (1Io-density chip), with 200 nano seconds speed, and is rated for BOK power on hours.Production, Cost, and Price Data for a Batcli of Memory Modules Production Data Production Quantity Data. Modules Deluxe 500 Standard 500 Chips Fast, hi-density (1,000 Bits) 200 Fast, lo-density (500 Bits) 600 Slow, lo-density (500 Bits) 500 Production Cost Data Modules Total deluxe assembly cost $1,500 Total standard assembly cost L000 Chips Total fabrication cost $24000 Market price Deluxe module $50.00 Standard module $17 .00