Question

Sell or Process Further

Abica Coffee Company produces Columbian coffee in batches of 6,600 pounds. The standard quantity of materials required in the process is 6,600 pounds, which cost $6 per pound. Columbian coffee can be sold without further processing for $9 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12 per pound. The processing into Decaf Columbian requires additional processing costs of $13,645 per batch. The additional processing also causes a 5% loss of product due to evaporation.

a. Prepare a differential analysis dated October 6 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2). For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
October 6
	Sell Regular Columbian (Alternative 1)	Process Further into Decaf Columbian (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues	$	$	$
Costs
Income (Loss)	$	$	$

b. Should Abica sell Columbian coffee or 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 two decimal places.
$ per pound

Answer 1

Req a;
Differential analysis
			Sell Regular	Process	Differential
				Further	effect on Income
Revenue			59,400	75240	15,840
Cost			0	-13,645	-13645
Income (Loss)		59,400	61,595	2195
Yes, The Product should be further processed.
Note: Computation of revenue after further processing:
Units produced before processing		6600
less: Loss to evaporation		330
Units produced after processing		6270
Multiply: Selling price after further processing	12
Sales revenue after further processing	75240
Req b:
Sales price after further processing	12
Less: Decrease in price possible (2195/6270)	0.35
Price of Decaf Columbian		11.65