Banker and Haghes (1994) demonstrated the economic sufficiency of normal activity - based unit cost for optimal pricing decisions. This paper provides an agency paralle to their analysis by examining how, in the presence of capacity cost, the desirable tradeoff between risk- sharing and incentives can be achieved through modification of the performance measures on which the contract is based. Similar to Banker and Hughes (1994), it was found in this study that the optimal capacity cost allocation is a function only of budgeted volume when capacity can be used to product a single product. Analysis of a joint production setting, however, reveals the optimal allocation to be based on the joint products estimated net realizable values. This paper proceeds as follows. In section 6, the basic linear model common to subsequent sections is presented. In section 7. The model is used to address the allocation of capacity costs. The contract is derived to show how capacity costs are reflected in optimal compensation. Then, the (same) solution is obtained under the requirement that the effect of capacity cost on the agents compensation must come through the accounting measure. Section 8 deals with allocation of joint costs in a similar fashion. Section 9 concludes the paper
"A Proposed Mathematical Model for Allocating Energy Costs and Joint Costs in Industrial Facilities in Light of Agency Theory,"
Jerash for Research and Studies Journal مجلة جرش للبحوث والدراسات: Vol. 4
, Article 3.
Available at: https://digitalcommons.aaru.edu.jo/jpu/vol4/iss2/3