Chemtech Chemicals, a multinational company, has a subsidiary located in a small Eastern European country. The country has only a few environmental protection laws, and even those that exist are not strictly enforced. The subsidiary’s three major products emerge at splitoff point from a common input. The joint costs are allocated to each product using the sales values at splitoff method. In addition to the three joint products, another product that emerges at splitoff point is a hazardous material. The hazardous material can be dumped into the Gulf at zero cost to the company. Alternatively, it can be processed further and sold as a cleaning liquid.
The cost accountant responsible for joint cost allocation presented the following comparative analysis to you, the controller:
1. Comment on the comparative analysis prepared by the cost accountant purely from a financial perspective. Show any supporting computations.
2. Assume, regardless of your conclusion in requirement 1, that adopting the process-further alternative would lead to a decrease in the company’s operating income. Disposal of the hazardous waste in a manner different from dumping it into the Gulf would also be costly. Discuss the legal and ethical implications of dumping the hazardous material into the Gulf.
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