Question

Sell or Process Further

Abica Coffee Company produces Columbian coffee in batches of 6,300 pounds. The standard quantity of materials required in the process is 6,300 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 $13,205 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)

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a. For both products, subtract the costs from the revenues per batch. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

b. Should Abica sell Columbian coffee or process further and sell Decaf Columbian?
Process into 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	5985	=6300*(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	56700	71820	15120
Costs	-37800	-51005	-13205
Income (Loss)	18900	20815	1915
b
Process further and sell Decaf Columbian
c
Price of Decaf Columbian	11.68	=12-(1915/5985)

Workings:
Revenues	=6300*9	=5985*12
Costs	=6300*6	37800+13205