Gallagher Company produces chemicals used in the mining industry. Each plant is dedicated to producing a single industrial chemical. One of its plants produces an electrolyte used in the copper industry's solvent extraction process. During the most recent year, the electrolyte plant produced and sold 3,000,000 pounds of electrolyte. No inventories of the chemical are carried. The chemical sells for $2.70 per pound. Annual manufacturing costs for the electrolyte plant totaled $3,615,000. The plant is also responsible for packaging and shipping its products. Distribution and packaging costs for the electrolyte plant were $300,000. Research and development costs are incurred centrally and assigned to each plant in proportion to their sales revenues.
The revenues of the electrolyte plant were 25 percent of the total revenues of the company. For the year just completed, the company reported $1.8 million for research and development. The company also reported $360,000 in sales commis- sions. Commissions are also assigned to plants in proportion to sales.
Required
1. Compute the unit product cost that must be used for external financial reporting purposes (cost per pound of electrolyte). How would the other costs be treated for external financial reporting?
2. Compute the unit operating product cost. What purpose might this cost serve?
3. Compute the unit value-chain product cost. Why would management want to know this product cost?
4. Classify the cost assignments for the value-chain product cost as direct tracing, driver tracing, or allocation. For any cost classified as allocation, is it possible to change this assignment to driver tracing or direct tracing? Explain.