1. Sell or Process Further
Dakota Coffee Company produces Columbian coffee in batches of 7,500 pounds. The standard quantity of materials required in the process is 7,500 pounds, which cost $6.00 per pound. Columbian coffee can be sold without further processing for $9.80 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.60 per pound. The processing into Decaf Columbian requires additional processing costs of $6,300 per batch. The additional processing will also cause a 5% loss of product due to evaporation.
a. Prepare a differential analysis dated December 11 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2). If required, use a minus sign to indicate a loss.
c. Determine the price of Decaf Columbian that
would cause neither an advantage nor a disadvantage for processing
further and selling Decaf Columbian. Round your answer to two
decimal places.
$ per pound
Decaf Columbian units | 7125 | =7500*(1-5%) | |
a | |||
Differential Analysis | |||
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2) | |||
December 11 | |||
Sell | Process | Differential | |
Regular | Further into | Effect | |
Columbian | Decaf | on Income | |
(Alternative 1) | Columbian | (Alternative 2) | |
(Alternative 2) | |||
Revenues | 73500 | 82650 | 9150 |
Costs | -45000 | -51300 | -6300 |
Income (Loss) | 28500 | 31350 | 2850 |
c | |||
Price of Decaf Columbian | 11.20 per pound | =11.60-(2850/7125) | |
Workings: | |||
Sell | Process | ||
Regular | Further into | ||
Columbian | Decaf | ||
(Alternative 1) | Columbian | ||
(Alternative 2) | |||
Revenues | =7500*9.80 | =7125*11.60 | |
Costs | =7500*6 | =45000+6300 |
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