Question

Bozeman Coffee Company produces Columbian coffee in batches of 10,000 pounds. The standard quantity of materials required in the process is 10,000 pounds, which cost $3.50 per pound. Columbian coffee can be sold without further processing for $8.00 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $9.50 per pound. The processing into Decaf Columbian requires additional processing costs of $7,500 per batch. The additional processing will also cause a 3% loss of product due to evaporation.

a. Prepare a differential analysis report for the decision to sell or process further.

Bozeman 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 Bozeman Coffee sell Columbian coffee or process further and sell Decaf Columbian?
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

Differential analysis:
Differential revenue
Revenue from sale of Decaf Columbian				(10000*9.50)*97%		92150
Revenue from sale of Columbian Coffee						80000
Differential revenue							12150
Differential cost per batch
Additional processing cost per batch							7500
Differential income from further processing							4650
Decision: Process Further
Req c:
Output of Decaf columbain
Total Output			10000	pounds
Less: Loss in Evaporation @3%			300	pounds
Net weight available for sale			9700	pounds
Additional cost of processing			7500
Per pound cost of processing			0.773196
Price of Columbian coffee			8
Price of Decaf Columbian			8.77
The price of Decaf Columbian shall be $ 8.77 to be indifferent.