Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 8 pages in length and its case teaching package is 8 pages.

Abstract

This case is set in 1974 in a Boston-based "hi-tech" firm which was a pioneer in the "solid state" electronic components that were the basis for "third generation" computers and were the early prototypes for modern integrated circuits. The basic issue is the classic "joint cost" dilemma.

Linkages to Textbooks or Journal Articles/Fit Within a Course

This is an excellent short case to introduce the managerial accounting issues related to the "joint cost" problem. Classic microeconomics argues unequivocally that attempts to assign cost to individual products in a "joint" set constitute a complete waste of time—"just maximize the total revenue over the batch." Like the comparable adage to "price so that marginal cost equals marginal revenue," the economists' advice about joint costing is certainly accurate, given the assumptions, but not particularly useful in practice. Most managerial accountants, including this author, believe that there are important managerial issues involved in accounting for joint cost in real companies. This case covers those issues for a real company.

Questions 1, 2, and 3 consider the calculational aspects of the issue. Question 5 considers what cost system to use, emphasizing behavioral considerations. Questions 3 and 4 address decision making under joint costing—how to think about cost when trying to maximize profit. Question 6 blends cost analysis and strategic positioning in a "cost plus" contracting situation.

We teach the case in one (90 minute) class period early in the required managerial accounting course. Questions 1 through 5 will easily fill one class period with useful discussion. We push hard to cover these questions in about 75 minutes so that we can also spend some time on question 6. This last question raises strategic positioning issues while reinforcing the accounting issues from the first five questions. We believe it is important to reinforce with the students the idea that strategic issues are always relevant to the managerial accounting issues, even in the "joint cost" context.

The defense contracting setting for question 6 heightens the costing dilemma—the assignment of joint cost to individual products is not supposed to be useful for decision-making, but the government will only accept a "cost-based price," and choosing a bid price is clearly a managerial decision!

Study Questions

1. In a period which began with zero inventories, how should Unitron assign the production output (400,000 units) of 20 batches to the sales orders (400,000 units)? The idea here is to construct a "produced as/sold as" matrix.
2. Compute the per unit costs for rectifiers in the 400 series under an average costing system and under a relative sales value system.
3. 1. What would be the revenue, cost, and profit if the order for 6,000 401's were accepted for immediate shipment:
      • under a physical unit costing system, and
      • under a relative sales value system.
   2. What should Helen Barnes recommend to Jim Jacoby regarding this order? Why?
4. What should she recommend regarding the offer from the toy company?
5. Which method of allocating joint costs should Unitron use? Which method yields better data for decision-making? Consider the behavioral implications of the two different approaches.
6. A government purchasing agent has just inquired again about the "cost plus" purchase contract for 100,000 404's. The contracting official had stated that a 10% profit margin would probably be allowable, if the price were "right" ($.75, or so). How much is the "cost"? What are your thoughts about price and manufacturing strategy for this possible contract? Assuming excess manufacturing capactiy is available, would you recommend bidding on this contract? If so, at what price?

The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.

If you do not have Microsoft Word, you can download the free Microsoft® Word Viewer 97 right here:   For Windows 3.x   For Windows 95

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