Joint-cost allocation, process further or sell. Iridium Technologies manufactures a variety of flash memory chips at its main foundry in Anam, Korea. Some chips are sold by Iridium to makers of electronic equipment while others are embedded into consumer products for sale under Iridium’s house label, Celeron. At Anam, Iridium produces three chips that arise from a common production process. The first chip, Apple, is sold to a maker of smartphones and personal computers. The second chip, Broadcom, is intended for a wireless and broadband communication firm. Iridium uses the third chip to manufacture and market a solid-state device under the Celeron name. Data regarding these three products for the fiscal year ended June 30, 2014, are given below.
Apple Broadcom Celeron
Units produced 510,000 990,000 1,500,000
Selling price per unit at split off $7.00 $4.00 0
Separable costs 0 0 $8,400,000
Final selling price per unit 0 0 $10.00
Iridium incurred joint product costs up to the splitoff point of $10,800,000 during the fiscal year. The head of Iridium, Amala Peterman, is considering a variety of alternatives that would potentially change the way the three products are processed and sold. Proposed changes for each product are as follows:
? Apple chips can be incorporated into Iridium’s own memory stick. However, this additional processing causes a loss of 55,000 units of Apple. The separable costs to further process Apple chips are estimated to be $1,500,000 annually. The memory stick would sell for $11 per unit.
? Iridium’s R&D unit has recommended that the company process Broadcom further into a 3D vertical chip and sell it to a high-end vendor of datacenter products. The additional processing would cost $2,000,000 annually and would result in 25% more units of product. The 3D vertical chip sells for $5.00 per unit.
? The third chip is currently incorporated into a solid-state device under the Celeron name. Galaxy Electronics has approached Iridium with an offer to purchase this chip at the splitoff point for $4.75 per unit.
Required
1. Allocate the $10,800,000 joint production cost to Apple, Broadcom, and Celeron using the NRV method.
2. Identify which of the three joint products Iridium should sell at the splitoff point in the future and which of the three the company should process further to maximize operating income. Support your decisions with appropriate computations.