Question

MediaForum has three operating groups: Games, News, and Documentaries. In May, the company incurred $24,000,000 of joint cost for facilities and administration. May revenues and separate production costs of each group are as follows:

a. What amount of joint cost is allocated to each operating group using the net realizable value approach? Compute the profit for each operating area after the allocation.

b. What amount of joint cost is allocated to each operating group if the allocation is based on revenues? Compute the profit for each operating group after the allocation.

c. Assume you are head of the Games Group. Would the difference in allocation bases create signifi cant problems for you when you report to the top management of the company? Develop a short presentation for top management if the allocation base in (b) is used to determine each operating group’s relative profi tability. Be certain to discuss important diff erences in revenues and cost fi gures for the Games and Documentaries groups.

Answer 1

c. Obviously, as head of the Games Group, a manager would be very concerned about the effects of allocating joint cost using the method in part (b). The result of the allocation is to make the Games Group appear to be unprofitable. Points (some of which could be rebutted) students might make in their presentations include:

1. The allocation of joint cost is totally arbitrary; there is no cause and effect relationship represented in the allocations in part (b).

2. The Games Group appears to have a different degree of facilities utilization than the News and Documentaries, given the high relationship of its separate costs to the separate costs of the other two groups. The allocations in part (b) fail to consider this fact.

3. The Games Group could be a start-up division and, as such, may be incurring substantially higher costs and may not have begun to reach its revenue potential.

 

 

a. $1,080,000 $ 5,400,000 $29,520,000

b. $(240,000) $ 5,760,000 $30,480,000

c. 1. The allocation of joint cost is totally arbitrary; there is no cause and effect relationship represented in the allocations in part (b).

2. The Games Group appears to have a different degree of facilities utilization than the News and Documentaries, given the high relationship of its separate costs to the separate costs of the other two groups. The allocations in part (b) fail to consider this fact.

3. The Games Group could be a start-up division and, as such, may be incurring substantially higher costs and may not have begun to reach its revenue potential.