Another Approach to Allocating Joint Costs: A Reply.

Abstract The article presents a response of the author on comments made by scholar Joseph G. Louderback on his article "Another Approach to Allocating Joint Costs. " The additional examples provided by "Another Approach to Allocating Joint Costs: A Comment, " by Louderback do not demonstrate the existence of a conceptual error in the joint cost allocation procedure which I have advocated. Rather, examples demonstrate the robustness of the procedure. The apparent weakness in the allocation procedure as demonstrated in "A Comment" results from an error in the specification of the next best alternative means to obtain a service. Consider the first example, a firm has the opportunity to purchase a lot consisting of 400 units of A and 200 units of B for 1, 500. The units of A are in saleable condition, but the B's would require an additional cost of 1, 200 to restore them to saleable condition. The firm normally purchases units of A for 6 each and units of B for 4 each. The allocation procedure which I proposed requires the comparison of the joint purchase cost' with the next best alternative. The firm has the option to purchase 200 B's for 800. However, the next best alternative to purchase 400 units of A is 51. 500. If the opportunity at hand were not available, the best alternative would be 2, 400; however, goods are available for 1, 500.