Donation of blood through the American Red Cross and other organizations is an important way to maintain the blood supplies which are critical to patient treatment in hospitals.
Three blood products are produced from blood received from donors: (1) red cells, used primarily in surgery; (2) platelets, used to prevent spontaneous bleeding in leukemia patients; and (3) plasma, used after further processing, for the treatment of protein deficiency.
The joint cost of producing the three products consists of the blood collection costs, the safety testing costs, and further processing in a laboratory to split off the three joint products. Commonly the joint costs are allocated to the three products on the basis of physical units produced. The National Blood Authority (NBA) in the UK observed the unfavorable effect of this approach in that the cost of each blood product could change significantly from time to time, as the demand for the products varied; the demand for the platelets was particularly volatile. In response, the NBA decided to allocate all joint costs to red cells, on the basis, in part, that plasma was routinely discarded to minimize the risk of Creutzfeldt-Jakob Disease.
Required
What are the advantages and disadvantages of the allocation approach proposed by the NBA?
What allocation method would you suggest as an alternative, if any?