Question

Sell or Process Further

Abica Coffee Company produces Columbian coffee in batches of 5,900 pounds. The standard quantity of materials required in the process is 5,900 pounds, which cost $6 per pound. Columbian coffee can be sold without further processing for $9 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12 per pound. The processing into Decaf Columbian requires additional processing costs of $11,638 per batch. The additional processing also causes a 5% loss of product due to evaporation.

a. Prepare a differential analysis dated October 6 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2). For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
October 6
	Sell Regular Columbian (Alternative 1)	Process Further into Decaf Columbian (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. Should Abica sell Columbian coffee or process further and sell Decaf Columbian?

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

Answer 1

Decaf Columbian units	5605	=5900*(1-5%)
a
Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
October 6
	Sell	Process	Differential
	Regular	Further into	Effect
	Columbian	Decaf	on Income
	(Alternative 1)	Columbian	(Alternative 2)
		(Alternative 2)
Revenues	53100	67260	14160
Costs	-35400	-47038	-11638
Income (Loss)	17700	20222	2522
b
Process further and sell Decaf Columbian
c
Price of Decaf Columbian	11.55	=12-(2522/5605)
Workings:
	Sell	Process
	Regular	Further into
	Columbian	Decaf
	(Alternative 1)	Columbian
		(Alternative 2)
Revenues	=5900*9	=5605*12
Costs	=5900*6	=35400+11638