Simultaneous Determination of Joint Product Cost Allocations and Cost‐Plus Prices

Use of the net realizable value approach for joint manufacturing cost allocations requires knowledge of selling prices of joint products. However, joint product selling prices themselves are functions of the allocated costs under a cost‐plus pricing policy. In this case, it is necessary to determine joint cost allocations and joint product prices simultaneously. This paper applies a nonlinear programming (NLP) approach to simultaneously determine the optimal joint production decision, joint product cost‐plus prices, and joint cost allocations using the net realizable value method. The NLP solution provides not only the optimal joint production and pricing decisions, but also the necessary conditions for such optimal decisions.