Question

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).

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 Effects (Alternative 2)
Revenues, per batch	$	$	$
Costs, per batch
Profit (loss), per batch	$	$	$

2. International Aluminum Co. should  process aluminum ingot further, rather than sell aluminum ingot because profits would be reduced  if ingot was processed further into rolled aluminum.

Answer 1

1.

Explanation:
● Revenue per batch from sale of ingot without processing = Quantity of ingot × Selling price per ton of ingot
= 80 tons × $1,100 = $88,000

● Revenue per batch from sale of rolled aluminium = Quantity of rolled aluminium × Selling price per ton of rolled aluminum

Quantity of rolled aluminium = 1.25 tons of ingot will produce 1 ton of rolled aluminum = 80 tons/ 1.25 = 64 tons
Selling price per ton of rolled aluminium = $2,200

Revenue per batch from sale of rolled aluminum = 64 tons × $2,200 = $140,800

● Cost per batch for producing ingot = $105 per ton of bauxite × 500 tones of bauxite = $52,500

● Cost per batch for producing rolled aluminum = Cost per batch for producing ingot + Additional processing cost to produce rolled aluminum

Cost per batch for producing ingot = $52,500
Additional processing cost to produce rolled aluminum = $620 per ton of ingot × 80 tons = $49,600

Cost per batch for producing rolled aluminum = $52,500 + $49,600 = $102,100

2. International Aluminum Co. should process aluminum ingot further, rather than sell aluminum ingot because profits would be increased by $3,200 per batch, if ingot was processed further into rolled aluminum.

Explanation:
The differential analysis shows a financial advantage of $3,200 when the company processes further into rolled aluminum.