Question

Cornerstone Exercise 17.4 (Algorithmic)
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 $75,000, and the result is 5,500 gallons of anderine and 8,100 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $10.00 per gallon and the dofinol for $6.05 per gallon. Alternatively, the anderine can be processed further at a cost of $8.60 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $60.

Required:

1. Which alternative is more cost effective and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

- Select your answer -Sell at split-offProcess it furtherItem 1 by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 530 gallons of anderine that undergo further processing require 21 more purchase orders at $11 each and 14 more quality inspection hours at $25 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

- Select your answer -Sell at split-offProcess it furtherItem 3 by $

Answer 1

Joint cost incurred upto split off point is sunk cost and hence not relevant

Benefit of processing further = Sales value after processing - Sales value before processing - further processing costs

=(5500/3)*60 - 5500*10-5500*8.60

=$7,700

Hence, processing futher is cost effective by $7700

2.Benefit of processing further = 7700-(5500/530)*21*11+(5500/530)*14*25

=$1670.75

Hence, process further by $1670.75