# The Champion Chip Company produces three grades of computer chips from a joint process: deluxe, superior, and good. Although the chips are manufactured in plants in several international locations, each grade is considered a separate product line and each product

The Champion Chip Company produces three grades of computer chips from a joint process: deluxe, superior, and good. Although the chips are manufactured in plants in several international locations, each grade is considered a separate product line and each product line manager earns a bonus based on the reported profit of his or her line. To calculate income upon which the bonuses are based, Champion allocates joint costs according to percentage of revenue. If all of the products are sold at the split-off point, this method would be the sales value at split-off point method. If products are processed further, each product’s percentage of total revenues (without subtracting separable costs) is used as the allocation base.

The management office for the deluxe line is located outside of London. The management office for the good line is located in San Francisco. The management office for the superior line is located in Hong Kong. Assume that the exchange rates are as follows:

U.S. Dollars

British pounds (£) ……………..          \$  2.00

Hong Kong dollars (HK\$) …….        \$0.125

A batch of chips costing \$1,000 yields chips with the following market values at the split-off point.

Alternatively, each manager could process the chips further, in which case the new sales values and further processing costs would be as follows:

REQUIRED

A. Determine product line and company-wide pretax income in U.S. dollars if each product is sold at the split-off point (use the sales value at split-off point method to allocate joint costs).

B. Each product line manager decides whether to process chips further. In making that decision, each manager assumes that the other two managers will sell their products at the split-off point. Analyze each manager’s decision choices and predict their decisions (translate all dollars to U.S. dollars first). Allocate the joint costs using each division’s percentage of total revenues. Show your calculations.

C. If optimal decisions were made for the entire firm (not just for each product line), what decision should each manager make about processing chips further?

D. Develop income statements by product line and for the entire organization assuming that managers make the decisions you predicted in part (B). Now develop income statements assuming that managers make the best decisions for the overall organization from part (C).

E. Now recast the income statements using the NRV method to determine the decisions managers would make.

F. Explain why the individual managers might make decisions that are not optimal for the company.

G. Recommend a bonus scheme that could reduce the problem of suboptimal decision making.