Question

ADP Mining Company mines an iron ore called Alpha. During the month of August, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are as follows:

	Delta			Super Delta			Pi			Precision Pi
Selling price	$	7	/ton	$	15	/ton	$	12	/ton	$	24	/ton

Processing costs to refine Delta into Super Delta are $2,400,000; processing costs to refine Pi into Precision Pi are $1,600,000.

Required:

a-1. What would be the incremental profit or loss per unit if Delta is refined into Super Delta? (Loss amounts should be indicated with a minus sign.)

Incremental profit (loss)_______

a-2. What would be the incremental profit or loss per unit if Pi is refined into Precision Pi?

Incremental profit (loss)________

Answer 1

Total Alpha mined and processed = 400,000 tons

Delta output = 400,000 tons * 60% = 240,000 tons

Pi output = 400,000 tons * 40% = 160,000 tons

1. If Delta is refined into Super Delta :

Incremental sales revenue per ton [ $15 - $7 ]	$8
(-) Processing cost per ton [ $2,400,000 / 240,000 tons ]	( $10 )
Incremental profit ( loss ) per ton	( $2 )

2. If Pi is refined into Precision Pi :

Incremental sales revenue per ton [ $24 - $12 ]	$12
(-) Processing cost per ton [ $1,600,000 / 160,000 tons ]	( $10 )
Incremental profit ( loss ) per ton	$2