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Unitron Corporation
This case is set in 1974 in a Boston-based "hi-tech" firm which was a pioneer in the "solid
state" electronic components that were the basisfor "third generation" computers and were
the early prototypes for modern integrated circuus. The basic issue ts the classic "joint cost"
dilemma.

In 1974, Unitron Corporation was only 20 years old, but it had already succeeded in positioning itself
as a respected producer of high-quality electronic components. Included among the fum's product
lines were rectifiers, thyristors, zeners, diodes, and other high-voltage assemblies. These products
represent fundamental electronic components in such fields as minicomputers, process controllers,
defense systems, and communications equipment. With sales of $30 million, Unitron was clearly much
smaller than the component industry's "Big Three" of Texas Instruments, Fairchild, and Motorola.
However, by concentrating on high performance in selected high-quality segments of the market,
Unitron had developed into the market leader in many specialty components. This gave the fmn a
competitive advantage that permitted them to maintain a price-leadership position within these
segments.
Rectifiers were a significant product group for Unitron. A rectifier's function is to allow
electrical current to pass in one direction while preventing movement in the reverse direction, Its
action therefore is similar to that of a valve in fluid mechanics. Exhibit 1 shows the steps in producing
a completed rectifier unit which is about 1/2 the size of a cigarette, The value of this product to the
final user is primarily determined by two characteristics; the rapidity of response in blocking current
reversals and the "surge capacity" or maximum voltage level the rectifier can withstand.
Unfortunately, for all manufacturers including Unitron, there is no known method of controlling
production procedures to obtain exact electrical characteristics. Each production batch differs from
other batches processed under ostensibly the same conditions. Furthermore, within each batch, the
individual units do not have precisely the same characteristics. Over many production runs, the
distribution of unit characteristics closely resembles a standard "bell curve."
The production process starts by placing a batch of 50 silicon wafers (purchased from outside
suppliers) in a furnace heated to 1,200·C and containing specially prepared metallic gas impurities. By
altering the concentration of the impurities, different electrical characteristics can be induced in the
wafers. However, an improvement in one characteristic is often accompanied by a decline in another,
Also, in spite of strict monitoring of the furnace conditions, small differences in temperature and gas
distribution do occur and these variations alter the final products,
Upon leaving the furnace, each wafer is cut into about 2,000 silicon chips, each approximately
the size of a ball-point pen tip. Exhibit 1 illustrates the production sequence then followed. First a
chip is fused between two metal cylinders making a "sandwich." In Step 2 this "chip sandwich" is
enveloped in a glass sleeve. In Step 3 this sleeve is heated while in place, forming a molecular bond
with the silicon chip. Silver or copper wires are then attached in Step 4. In Step 5, the finished product
is painted according to a color code.
The wafers and chips are tested at each step during production for physical and electrical
defects. About 60% of the 100,000 chips in a batch reach the end of Step 3. Of that percentage, only
one-third or less are eventually sold as part of the regular product line, Another 5,000 units at the
lower end of the distribution have limited marketability and are not repairable. Although Unitron did
not consider these items to be part of the regular product line, they were offered for sale as "seconds"
for use as components in relatively inexpensive and usually disposable items such as toys or small
home appliances. No marketing effort was devoted to these "by-product" units. The overall
manufacturing process in summarized in Exhibit 2.
256
Production cost data relating to the rectifier
series is reproduced below:
Product Cost Data for 400 Series Rectifiers
Annual Costs
Batch. Costs
Direct Materials $2,500
Direct Labor 1,600
Variable Overhead . 2,300
Total $6,400 x 201 $128,000
Nonvariable Rectifier
Manufacturing Costs2 32,000
General Factory Overhead
Costs2 40,000
Total Manufacturing Cost $200,000
Production of 400 Series rectifiers was running at
about 20 batches per year.
2 Allocated to 400 Series rectifiers based on direct labor
cost.
ACCOUNTING· THE JOINT COST PROBLEM
Whenever production costs are not directly assignable to
specific units, cost accounting systems rely on allocation
rules to assign the costs to the units. Direct material cost,
for example, is usually directly identifiable with
individual units. But, equipment depreciation must
somehow be allocated to the units produced on that
equipment. A "fully allocated cost per unit" is deemed
necessary by most companies for purposes of valuing
inventory and to create a cost base for use in managerial
decision making.
The manufacturing of the silicon "sandwich" by
Unitron creates components with differing electrical
characteristics and therefore differing sales value, but the
manufacturing costs are "joint" with respect to the batch.
In other words, there is no way to specifically match any
of the costs with any of the individual components
produced in one batch. All that can be said is that certain
costs are incurred to produce a batch which contains
rectifiers with varying electrical characteristics.
There are two common techniques used for
allocating such joint costs. The fITst method is to divide
all joint costs by the total number of salable units
produced during the process. This method is often called
the "average" or "physical unit" approach. It normally
yields a different gross margin percentage for each end
product since the allocated costs per unit are equal
regardless of the sales value per unit.
A second widely used joint cost-allocation
Unitron Corporation
method is called the "relative sales value" approach. It
assigns costs to units based on each unit's pro-rata share
of the total market value of all units produced. For
example, if products A, B, and C cost $800 to produce,
jointly, and have sales values of $500, $300, and $200,
respectively, the allocation of costs to produce B is 30%
(300/1000) of $800, or $240. When this method is used,
the gross margin percentage for all products is always the
same. Exhibit 3 shows some common examples of the
joint cost problem and a more detailed example of the two
main methods of accounting for j oint costs.
THE BUSINESS PROBLEMS
Exhibit 4 lists sales prices and present inventory levels for
the 400 series rectifiers, along with projected annual sales
and production. The breakdown of products per batch
remains fairly constant from batch to batch.
Helen Barnes, a recent MBA graduate, was just
beginning a 6 month train.ing assignment as assistant to
Unitron's sales manager, Jim Jacoby. He called her
attention one morning to an order for 6,000 units of series
40 I rectifiers which had just been received. While many
of the product lines were not inventoried, rectifiers
normally were. However, very few of the 401 units were
currently available in inventory. To satisfy the customer's
needs, the order had to be filled with units that met or
exceeded the specifications of the product ordered. The
customer was perfectly willing to accept rectifiers whose
performance characteristics exceeded the minimum
specified levels; however, the customer was not willing to
pay for the extra quality.
Jim Jacoby asked Helen which would be better
for Unitron:
1. to fill out the order with 402 rectifiers,
2. to trigger a production run in order to be able to fill
the order with 40 ls,
3. to tum down the order because of the "out of stock"
condition.
If additional production were authorized,
inventory levels of other units would obviously go up.
Jacoby was concerned about this because his performance
was evaluated partly in terms of the profits generated by
the rectifier lines after deducting a charge for inventory
carrying cost. Besides the chance of inventoried rectifiers
becoming obsolete in the marketplace, the higher level of
inventory would tie up more cash. Jacoby was charged
carrying costs of 2% a month on all inventory. He liked
to keep inventory at no more than one month's sales,
because he thought a turnover ratio of 12 times was a
 1~'~~~~'~orporanon
.!!nttron
good compromise between stockout risk and excess
investment.
After discussing this order, Jacoby also asked
Barnes for her opinion about an offer which had recently
been received from a local toy company to purchase 4,000
of the Series 400 "seconds" units each month at a price of
$.15 per unit. The toy company was willing to sign a firm
contract calling for 48,000 units during the next year.
Jacoby said the production manager was against accepting
this business at what he caned a "giveaway price." He
had said that $.15 wouldn't even cover the out-of-pocket
expenses of $.32 per unit and that no one in their right
mind would tie themselves down to a long-run contract at
a price which didn't even cover the variable costs.
Jacoby, however, was bothered by the growing
accumulation of inventory of the seconds, even though
they were carried at zero inventory value (see Exhibit 4).
He asked Helen whether she agreed with the production
manager that he was being naive to think of the $.15 as
pure profit just because of the zero inventory value
assigned to these units by the cost accounting department.
Another problem Jacoby was considering
involved a one-time Defense Department request for bids
on 100,000 units of the 404 Series rectifiers. The request
asked for a "cost plus" bid, but Jim was not sure what
"cost" was. He felt sure the government was expecting
bids at something less than Unitron's list price 0£$.80 per
unit. Probably, $.75 was close to what the government
was expecting to pay, per unit. Delivery was to be
scheduled over eighteen months, at about 5500 units per
month.
Unitron did not want to be too heavily dependent
on government business and had worked hard to bring the
mix of business up to 75% commercial/ 25% government
in 1974. But this bid was for work on a prestigious new
defense system which could be good for Unitron's
reputation, if costs and prices could be worked out.
' .
.
.... ~
-=257
QUESTIONS
I. In a period which began with zero inventories, how
should Unitron assign the production output (400,000
units) of 20 batches to the sales orders (400,000
units)? The idea here is to construct a "produced
as/sold as" matrix.
2. Compute the per unit costs for rectifiers in the 400
series under an average costing system and under a
relative sales value system.
3. A. What would be the revenue, cost, and profit if
the order for 6000 40 I' s were accepted for
immediate shipment:
- under a physical unit costing system
- under a relative sales value costing system.
B. What should Helen Barnes recommend to Jim
Jacoby regarding this order? Why?
4. What should she recommend regarding the offer from
the toy company?
5. Which method of allocating joint costs should
Unitron use? Which method yields better data for
decision-making? Consider the behavioral
implications of the two different approaches.
6. A government purchasing agent has just inquired
again about the "cost plus" purchase contract for
100,000 404'5. The contracting official had stated
that a 10% profit margin would probably be
allowable, if the price were "right" ($.75, or so).
How much is the "cost?" What are your thoughts
about price and manufacturing strategy for ~is
possible contract? Assuming excess manufa~tu~g
capacity is available, would you recommend bidding
on this contract? If so, at what price? _
..~~
258 . _]U~ni~tro~n~C~Ow~om~ti~·oo

EXHIBIT 1

, The Chip

L...----O DOD Step 1

,
~~---J
\ '-----..v,-----)

Glass
Sleeve ___....
D []]_ "Sandwich" Step 2

0
arID
Step 3
~

~OJ ~ Step 4

Step 5

Color Coded Paint

Unitron 2.59

EXHIBIT 2

Tbe Manufacturing Process

Purchased Raw Material

(50 Silicon Wafers)

Bake at 120if C with Special Gasses

;
Cut into 100,000 Very Small Chips
.

.Manufacture a "Chip Sandwich"

(Lose 40,000 Chips in Manufcturing)

;
Test 60,000 Chips for Electrical CharaCteristics

(There is a Random Distribution of Product Specifications)

On Average

•
By-Products
Scrap ("Seconds!') Regular Product Line
35,000 Units 5,000 Units 20,000 Units
of series #400 401 402 403 404 405
4500 6000 4500 3000 2000
260. Unitron Corporation

EXHIBIT 3

The Joint Cost Problem

All manufacturing (or service) costs apply jointly to all of the products (services). There is no way to
specifically identify costs with each specific product (service).

Examples

Oil Refinery (Gasoline/ Diesel! Heating oil! Jet Fuel)

Railroads or Airlines (Passengers! Freight/ Mail)
Postal Service (Home mail! Bulk maill Packages)
Slaughterhouse (Steak! Roasts! Hamburger)
Mining (High grade ore! Low grade ore)
Batch Process Electronic Components

Two Major Accounting Methods

1. Physical Unit Approach

2. Relative Sales Value Approach

A Simple Example (Butchering a Cow)

Joint Costs: The Cow $580

Labor Cost $160 (8 hours x S20/hour)
Depreciation on
the butcher knife
& table _llQ
Total Cost $750
Meat Produced = 300 pounds of hamburger (which sells for S2.00llb.)
200 pounds of steak (which sells for $4.501lb.)
500 pounds ($1500 sales value)

Physical Unit Approach Cost Per Pound

Cost = $7'50 Hamburger
Meat produced = 500 pounds
Cost/pound (for all meat) $1.50 $1.50

Profit/pound (% of Sales) $3.00 (67%) .50 (25%)

Relative Sales Value Approach

% of sales value 900 600/ 600 00
1500 = 70 1500 =4 Yo

Cost allocation 60% x $750 = $450 40% x 750 = $300

$450
Cost per pound 200 = $2.25 $330000= $1.00

Profit per pound COlo of Sales) 2.25 (50%) 1.00 (50%)

• Unitron 261

EXHIBlT4

Series 400 Redifiers

Maximum Annual Current Annual

Voltage Sales Orders Inventory Production
Product Blocka,e (volts) (units) Sales Price/Unit (units) (units)

401 .25-.74 300 100,000 S .40 3,000 90,000

402 .75-1.24 400 140,000 .60 10,000 120,000
403 1.25-1.74 500 100,000 .70 9,000 90,000
404 1.75-2.24 600 40,000 .80 8,000 60,000
405 2.25-2.75 700 20,000 1.00 5,000 40,000
400,QOO ~ ~QQIQ2Q

A typical batch also yields 5,000 of the lower-quality "by-product" units which Unitron offered for sales as "seconds."
Demand for the "seconds" fluctuated widely and was very price-sensitive. Unitron offered these units at a price of S.25
each, but sales had been very slow during the past year. An inventory of 65,000 units had accumulated. By-products Wee
these units were not considered to be part of the regular product Line, and were not assigned an inventory value.
Whatever revenue they generated was considered miscellaneous income and was offset against cost of goods sold for
financial statement purposes.