Question

Sell or Process Further Abica Coffee Company produces Columbian coffee in batches of 5,700 pounds. The standard quantity of materials required in the process is 5,700 pounds, which cost $5.00 per pound. Columbian coffee can be sold without further processing for $7.40 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.00 per pound. The processing into Decaf Columbian requires additional processing costs of $11,150 per batch. The additional processing will also cause a 5% loss of product due to evaporation. a. Prepare a differential analysis report for the decision to sell or process further. Abica Coffee Company Proposal to Process Columbian Coffee Further Differential Analysis Report Differential revenue from further processing per batch: Differential cost per batch:

Answer 1

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Abica Coffee
Revenue if not processed	Amount $			Revenue if processed	Amount $
Pounds	5,700.00	A		Pounds	5,700.00	See A
Sell Price per pound	7.40	B		Less: loss due to evaporation	285.00	D= A*5%
Revenue if not processed	42,180.00	C=A*B		Net quantity sold	5,415.00	E=A-D
				Sell Price per pound	11.00	F
				Revenue if processed	59,565.00	G=E*F

Answer a
Differential analysis report	Amount $
Revenue if processed	59,565.00	See G
Revenue if not processed	42,180.00	See C
Differential Revenue	17,385.00	H=G-C
Differential cost
Further processing costs	11,150.00	I
Differential Income	6,235.00	J=H-I
Answer b
If Abica coffee will sell decaf Columbian it will have incremental income of $ 6,235 so it should further process and sell decaf Columbian coffee.
Answer c
Differential Income	6,235.00	See J
Net quantity sold	5,415.00	See E
Differential Income per pound	1.15	K=J/E
Sell Price per pound	11.00	See F
Revised Sell Price per pound	9.85	L=F-K
At $ 9.85 per pound Abica does not have any financial advantage or disadvantage of selling Decaf Columbian.
Proof:
Revenue if processed	Amount $
Pounds	5,700.00	See A
Less: loss due to evaporation	285.00	D= A*5%
Net quantity sold	5,415.00	E=A-D
Sell Price per pound	9.85	See L
Revenue if processed	53,330.00	M=E*L
Differential analysis report	Amount $
Revenue if processed	53,330.00	See M
Revenue if not processed	42,180.00	See C
Differential Revenue	11,150.00	N=M-C
Differential cost
Further processing costs	11,150.00	See I
Differential Income	-	O=N-I
As differential income is zero it means Abica does not have any financial advantage or disadvantage of selling Decaf Columbian at $ 9.85 per pound.