Question

Differential Analysis for Further Processing

The management of International Aluminum Co. is considering whether to process aluminum ingot further into rolled aluminum. Rolled aluminum can be sold for $2,200 per ton, and ingot can be sold without further processing for $1,100 per ton. Ingot is produced in batches of 80 tons by smelting 500 tons of bauxite, which costs $105 per ton of bauxite. Rolled aluminum will require additional processing costs of $620 per ton of ingot, and 1.25 tons of ingot will produce 1 ton of rolled aluminum (due to trim losses).

Required:

1. Prepare a differential analysis as of February 5 to determine whether to sell aluminum ingot (Alternative 1) or process further into rolled aluminum (Alternative 2). Use a minus sign to indicate subtracted amounts, negative amounts, or a loss.

Differential Analysis
Sell Ingot (Alt. 1) or Process Further into Rolled Aluminum (Alt. 2)
February 5
	Sell Ingot (Alternative 1)	Process Further into Rolled Aluminum (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per ton	$	$	$
Costs, per ton
Income (loss), per ton	$	$	$

Answer 1

Particulars	Sell ingot(Alternative 1)	Process further into Rolled Aluminium (Alternative 2)	Differential Effect on Income (Alternative 2
Revenues,per ton	$1,100.00	$2,200.00	$1,100.00
Cost, per ton	($656.25)	($1,595.31)	($939.06)
	(Working 1)	(Working 2)
Income (loss), per ton	$443.75	$604.69	$160.94
	($1100-$656.25)	($2200-$1595.31)
The product should be further processed into rolled aluminium as there would eb increamental profit of $604.69 per tom of rolled aluminum
Working 1
500 tons of bauxite produces 80 tons of ingot
Cost for 1 ton of bauxite = $105
1 ton of ingot =	500/80	tons of bauxite
	6.25	tons of bauxite
Cost of 1 ton of ingot		$105*6.25
Cost of 1 ton of ingot		$656.25
Working 2
Cost of 1 ton of rolled aluminium
1.25 ton of ingot =	1 ton of rolled aluminium
Cost for 1 ton of aluminium	$ 656.25 per ton*1.25
	$820.31
Additional processing cost	$ 620 per ton of ingot
Additional cost of processing 1 ton of rolled aluminium	$620*1.25
	$775
Total processing cost	$ 820.31+$775
	$1,595.31