Question

Zing Coffee Company produces Columbian coffee in batches of 5,500 pounds. The standard quantity of materials required in the process is 5,500 pounds, which cost $6.00 per pound. Columbian coffee can be sold without further processing for $6.40 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 $11,150 per batch. The additional processing will also cause a 4% 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 35,200

Differential revenue $

Differential cost per batch:
Additional cost of producing Decaf Columbian

Differential income from further processing Decaf Columbian per batch

Answer 1

a)

Proposal to Process Columbian Coffee Further

        Differential revenue from further processing per batch:

            ................ Revenue from sale of Decaf Columbian [(5,500

                 .............. pounds – 220* pounds evaporation) × $12.00]                                   $63,360

            ............................ Revenue from sale of Columbian coffee

                 .................................................... (5,500 pounds × $6.40)                                     35,200

        Differential revenue.................................................................                           $ 28,160

        Differential cost per batch:

            ................ Additional cost of producing Decaf Columbian                                                 11,150

        Differential gain from further processing:

            ................................................ Decaf Columbian per batch                                       $        17,010

       

        *4% × 5,500

b.    The differential revenue from processing further to Decaf Columbian is more than the differential cost of processing further. Thus, Zing Coffee Company should process Decaf Columbian and not sell Columbian coffee.

c.     The price of Columbian coffee would need to increase to $9.5(6.40+3.1) per pound in order for the differential analysis to yield neither an advantage or a disadvantage (indifference). This is determined as follows:

       $170,10/5500 =3.09

       The price of Columbian coffee would need to be $3.09 higher, or $9.5, to yield no net differential income or loss. This is verified by the following differential analysis:

        Differential revenue from further processing per batch:

                    Revenue from sale of Columbian coffee[(5,500

                 .............................................................................. pounds × $9.5]                       $52,250

                    Revenue from sale of Decaf Columbian coffee

                 ..................... (5,500 pounds -220 due to evaporation × $12.00)                         63,360

                    Differential revenue.................................................................                       -$11,110

        Differential cost per batch:

                    Additional cost of producing Decaf Columbian....................                         11,150

        Differential income from further processing:

                    Decaf Columbian per batch....................................................                $   40

Slight difference of $40 is coming due to decimal point round off