Reference no: EM132520911

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

Product Line            Physical Volume            Unit Selling Price

Chemical A             10,000 units                    $79.20

Chemical B               12,000 units                 $36.00

Chemical C                18,000 units                 $20.00

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

Question a. Provide a quantitative analysis that illustrates the issues identified by the manager of Chemical C and the manager of Chemical A.

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

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