Assignment 7

Gouri Sankar Sahoo M092-15 Section B

Case 19.5:- Lynch’s Chicken Ranch Inc.

Solution:-
As per the discussion among Gary Judy and Ron….the problem
has come up basically due to the drought in the Midwest region
because of which the chicken feed prices have gone up by
20%.According to the case details, the feed is being purchased by
Egg division headed by Gary from the Feed division at current
market price. The transaction at market price is quite justified one
as in a joint costing process there is no point in incurring losses by
Feed division. Hence it is apt on the part of Ron who heads feed
division to disagree with Gary’s point of view. Furthermore the
claims put forward by Ron that during the bumper crop period,
when the profit taken up by Egg division was not shared with feed
division justifies that the transaction should be done or carried out
at Market Price only.

The losses incurred by Egg division can be shared by both egg

division and fertilizer division as the profits raked up by fertilizer
division is dependent on egg division’s performance also, so a
certain portion of losses incurred by egg division should be shared
by Fertilizer division. In addition to that, if egg division reduces or
cuts own the flock, it would be a precarious condition for Fertilizer
division as well, because of which the fertilizer division won’t be
able to cover up their fixed costs.

In my opinion in such cases of Joint costing, it would be better for

the Lynch company to bring Egg division and fertilizer division
under a single division as the products i.e. egg and fertilizer are
dependent in nature, so that this loss won’t be incurred only by
egg division rather it would result in better profitability of the
entire organisation in toto .Furthermore the fixed costs borne by
fertilizer department would also be significantly reduced which is
much better way of complementing with each other resulting in
better profitability of both the subdivisions.