Question

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 $77,500, and the result is 5,900 gallons of anderine and 8,100 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $13.00 per gallon and the dofinol for $7.10 per gallon. Alternatively, the anderine can be processed further at a cost of $7.60 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $59.

Required:

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

by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 560 gallons of anderine that undergo further processing require 20 more purchase orders at $11 each and 14 more quality inspection hours at $26 each. Which alternative would be better and by how much?
NOTE: Round interim calculations and your final answer to the nearest cent.

by $

Answer 1

since the net income from Anderine is more than Cermine by $5506 it would be beneficial not to further process Anderine Cermine.

The process cost of $77500 is irrelevant as it is sunk cost.

b)

since the net income from Anderine is more than Cermine by $11660 (rounded off) it would be beneficial not to further process Anderine Cermine.