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 $79,000, and the result is 6,000 gallons of anderine and 7,600 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $11.00 per gallon and the dofinol for $5.95 per gallon. Alternatively, the anderine can be processed further at a cost of $7.80 per gallon (of anderine) into cermine. It takes 4 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $59.

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.

by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 520 gallons of anderine that undergo further processing require 19 more purchase orders at $12 each and 14 more quality inspection hours at $25 each. Which alternative would be better and by how much?
NOTE: Round interim calculations and your final answer to the nearest cent.

Answer 1

Answer 1

Sale at split-off point is more effective by $ 24,300

Note:

Process further	Amount	Sale at split-off point	Amount
Sales value after processing	$      88,500	Sales value	$      66,000
Less: Extra Cost	$      46,800
Net benefit	$      41,700	Net benefit	$      66,000

Answer 2

Sale at split-off point is more effective by $ 30,969.23.

Note:

Process further	Amount	Sale at split-off point	Amount
Sales value after processing	$ 88,500.00	Sales value	$ 66,000.00
Less: Extra Cost	$ 46,800.00
Less: Extra Cost of purchasing	$   2,630.77
Less: Extra Cost of inspection	$   4,038.46
Net benefit	$ 35,030.77	Net benefit	$ 66,000.00

Calculations:

Process further	Amount	Sale at split-off point	Amount
Sales value after processing	=1500*59	Sales value	=6000*11
Less: Extra Cost	=6000*7.8
Less: Extra Cost of purchasing	=6000/520*19*12
Less: Extra Cost of inspection	=6000/520*14*25

In case of any doubt, please comment.