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 $77,000, and the result is 5,900 gallons of anderine and 7,600 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.85 per gallon. Alternatively, the anderine can be processed further at a cost of $7.30 per gallon (of anderine) into cermine. It takes 4 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $58.

Required:

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

Process it further 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 18 more purchase orders at $8 each and 18 more quality inspection hours at $27 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

Sell at split-off by $

Answer 1

Answer 1:
No further processing:
	Rate	sale
5900 gallons Anderine	12	70800
7600 gallons of Dofinol	6.85	52060
Net proceed from sale		122860
Less: Cost of processing		77000
Profit (122860 – 77000)		45860
Further processing:
7600 gallons of Dofinol	6.85	52060
Cermine:
Sale proceeds
Quantity of Cermine (5900/4)	1475
Sale price	58 per gallon
Sale proceeds		85550
Net sale proceeds		137610
Less: Cost of processing
Standard processing cost	77000
Additional processing cost of Anderine (5900 x 7.30)	43070
		120070
Profit (137610 – 120070)		17540

Thus, the option to sale anderine and dofinol without further processing is cost effective option as the profit would be higher by (45860-17540) =$28320.

Requirement 2:

Further processing:
7600 gallons of Dofinol	6.85	52060
Cermine:
Sale proceeds
Quantity of Cermine (5900/4)	1475
Sale price	58 per gallon
Sale proceeds		85550
Net sale proceeds		137610
Less: Cost of processing
Standard processing cost	77000
Additional processing cost of Anderine (5900 x 7.30)	43070
Additional purchase orders (18 x 8)x3	432
quality inspection costs (18x27)x3	1458
		121960
Profit (137610 - 121960)		15650

Thus, the option to sale anderine and dofinol without further processing is cost effective option as the profit would be higher by (45860-15650) =$ 30,210.