NuSkin Inc. has two separate profit centres: Chemicals and Cosmetics. The firm acquires its major ingredient for both di

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NuSkin Inc. has two separate profit centres: Chemicals and
Cosmetics. The firm acquires its major ingredient for both
divisions jointly. Currently, this material is purchased in
1,000-kg for $2,000. The material is passed through an
exclusive separator process. After separation, Chemicals receives
300 Litre of chemical J-52A, and Cosmetics receives 200 kg of
K-89C. The Chemicals division must process chemical J-52A further
before it can be sold. Additional processing costs $150 per litre,
and the chemical is then sold for $5/L. The Cosmetics division
bottles and packages K-89C as an antiperspirant at a cost of $250
per lot. The antiperspirant is sold for $7/kg.
NuSkin has the opportunity to buy higher-quality lots of raw
materials for $3,000. Some questions have been raised about the
health effects of certain ingredients in antiperspirants, and the
higher-quality raw material does not contain any of these
ingredients. If NuSkin buys the new material, Chemical's processing
costs will increase to $400 per litre, but the selling price of its
product will remain the same. Cosmetics' selling price will
increase to $15/kg, and its separable costs will remain the
same.
The CEO would like you to prepare a qualitative and quantitative
analysis of whether to purchase a higher quality litre of raw
materials for $3,000. Your analysis and recommendation should
include the following:
A. Assume NuSkin did not purchase the higher-quality lots of raw
materials for $3,000, determine the income per litre that each
division would report if joint costs were allocated on a net
realizable value basis.
B. Assume that NuSkin does purchase the higher-quality litre of raw
materials for $3,000:
1. If you were the manager of Chemicals, would you want the firm to
buy the higher-quality material? Show your calculations, and
explain your position.
2. If you were the manager of Cosmetics, would you want the firm to
buy the higher-quality material? Show your calculations, and
explain your position.
3. Describe the pros and cons to the company as a whole from
purchasing the higher-quality material.
C. Explain why top management faces uncertainties about how to
handle situations such as the purchase higher-quality lots of raw
materials for $3,000.
D. What methods/incentives can be used to encourage managers who
have conflicting interests to take actions that are in the best
interests of the company as a whole?
E. Recommendation for avoiding potential conflicts for similar
types of future decisions in a way that is fair to both
managers.