Question

Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $78,000, and the result is 5,800 gallons of anderine and 8,000 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.75 per gallon. Alternatively, the anderine can be processed further at a cost of $8.60 per gallon (of anderine) into cermine. It takes 4 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $57. Required: 1. Which alternative is more cost effective and by how much? NOTE: Do NOT round interim calculations and, if required, round your answer to the nearest dollar. Process it further by $ 2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 470 gallons of anderine that undergo further processing require 19 more purchase orders at $10 each and 16 more quality inspection hours at $27 each. Which alternative would be better and by how much? NOTE: Round interim calculations and your final answer to the nearest cent. Sell at split-off by $

Answer 1

Part 1

Process it further

by

$4120

	Sell at Split-off	Process further	Differential amount to process further
Sales revenue	69600	123600	54000
Further processing cost	0	(49880)	(49880)
Total	$69600	$73720	$4120

5800*12 = 69600

8000*6.75 = 54000

5800*8.60 = 49880

Part 2

Sell at Split-off

by

$3556

	Sell at Split-off	Process further	Differential amount to process further
Sales revenue	69600	123600	54000
Added purchasing		(2345)	(2345)
Added inspection		(5331)	(5331)
Further processing cost	0	(49880)	(49880)
Total	69600	66044	(3556)

Added purchasing = (5800/470) × 19 purchase orders × $10 = 2345

Added inspection = (5800/470) × 16 inspection hours × $27 = 5331