Question

Sell or Process Further

Zing 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 $8.40 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12.00 per pound. The processing into Decaf Columbian requires additional processing costs of $13,350 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.

Zing Coffee Company
Proposal to Process Columbian Coffee Further
Differential Analysis Report
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian	$
Revenue from sale of Columbian coffee
Differential revenue		$
Differential cost per batch:
Additional cost of producing Decaf Columbian
Differential income from further processing Decaf Columbian per batch		$

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a. Follow Exhibit 10 in the text. For both products, subtract the costs from the revenues. Determine the differential effect on the revenues, costs, and income (loss).

b. Should Zing Coffee sell Columbian coffee or process further and sell Decaf Columbian?
Yes, 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 the nearest cent.
$ per pound

Answer 1

Solution a:

Zing Coffee Company
Proposal to Process Columbian Coffee Further
Differential Analysis Report
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian	$64,980.00
Revenue from sale of Columbian coffee	$47,880.00
Differential revenue		$17,100.00
Differential cost per batch:
Additional cost of producing Decaf Columbian		$13,350.00
Differential income from further processing Decaf Columbian per batch		$3,750.00

Solution b:

Zing coffee should process further and sell Decaf Columbian.

Solution c:

Price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian = Existing price - (Differential income / Nos of units of decaf columbian)

= $12 - ($3,750 / (5700*95%)] = $11.31 per pound