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The qualitative factors which shall be considered by the management are:

  • Reliability of raw material supplier,
  • Quality of the product which would be manufactured after further processing,
  • Expected delays which the production of joint products will cause,
  • Buyer’s acceptance of the product.

The management of Taylor Chemical Company shall prefer net relative sales value method of accounting instead of physical weight method, because net relative sales value method uses the sales value of the total output to calculate allocation percentage for each of the joint product. Following table shows the effect of net sales value method on the gross profit margin and the joint cost allocated to each product:

The calculations shown above indicate a decrease in gross profit by AED 100,000 while switching from physical weight method to net sales value method. The net sales value method is the true representative of the situation, because it will provide more relevant data to the company, because through this method the percentage of the gross profit for every product will be same. Moreover, net sales value method of allocating joint costs is considered to be a very realistic way to deal with joint cost allocation, because it helps in allocating joint costs on the basis of the selling price each product is carrying. On the other hand, it has also been proved that it is not feasible for the company to process R2 further because the physical weight method does not show any increase in the gross profit after processing further R2. While the net sales value method shows that the further processing of R2 will result in a gross profit equal to AED 138,000, which is lower than the gross profit attainable after selling R2 as it is.

Critiques and revision to the Taylor company’s analysis is as follows:

The decision made by Taylor is correct because the further processing of R2 will result in no increase in the gross profit. Therefore, it is better for the Taylor Company to sell out R2 without further processing. But, the method chosen by the management of Taylor Company in finding out the costs associated with D3 and D7 is not representative of the situation and does not give equitable share to the products. The management should have used net sales value method in finding out the portions of joint cost attributable to each of the joint product because under net sales value method the joint costs are allocated on the basis of the selling prices of the products and thus prove to be more realistic. Moreover, if the proposed method could have been followed the sales value of each product would have been calculated in accordance with the probability given. Instead of physical weight method, net sales value method should have been preferred.

Following are the calculations for the gross profit:

Without processing R2 further, the gross profit is AED 234,000. The company’s analysis shows the gross profit of AED 238,000. Thus, there is a difference of AED 4,000, which shows that the product R1, though it is indispensable, is showing a loss. But the company cannot quit producing R1 because both R1 and R2 have to go together.

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