PROBLEMS AND EXERCISES #2 4
and Atlanta (474,581 and 458,083 respectively) with a $16,498 profit difference. The change
takes into account the excess corporate expenses of $500,000 incurred. This change should be
allocated to the specific unit to which it was acquired. However, they were charged and allocated
to all of the regional offices.
f. Comment on the appropriateness or inappropriateness of ETB’s current cost allocation
ETB’s current cost allocation methodology would be deemed as inappropriate. This
would be explained because the fixed overhead rates are allocated based on revenue. Since
revenue is not equal across all regions, especially since some regions make much more than
others, this would be an inappropriate action. In order to create a more appropriate source of cost
allocation methods, the cost pool should be allocated based on the regional activities, and
therefore utilize the cost pool of $4,280,000 rather than the current method and allocate based on
a case-by-case basis and perhaps vary in some cases per region.
a. Critically evaluate the analysis underlying the pricing decisions of $900 for Q and
$750 for Y.
In the problem, the pricing decisions are incorrect as it takes into account the joint fixed
costs while allocating them to the products and then treating the allocated costs as marginal
costs. The demand curves for the enzymes are PQ = 1,300 - 2Q and PY = 950 - 4Y. The only
costs that should be considered for the pricing decision would be the $200,000 joint cost (fixed
cost), the marginal cost Q of $100, and the marginal cost Y of $150. Q generates a profit of
$80,000 and Y with $10,000 totaling $90,000 but the profit does not take the fixed costs of the
250 ounces that remain unsold into account and only half of the output ends up being sold. The