In: Accounting
Sell or Process Further
Abica Coffee Company produces Columbian coffee in batches of 4,100 pounds. The standard quantity of materials required in the process is 4,100 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 $8,671 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
(a)
Abica Coffee Company | ||
Proposal to Process Columbian Coffee Further | ||
Differential Analysis Report | ||
Differential revenue from further processing per batch: | ||
Revenue from sale of Decaf Columbian (4,100 - 5%) x $12 | $46,740 | |
Revenue from sale of Columbian coffee (4,100 x 9) | 36,900 | |
Differential revenue | $9,840 | |
Differential cost per batch: | ||
(Additional cost of producing Decaf Columbian, Decaf Columbian per batch, Differential revenue, Revenue from sale of Columbian coffee, Revenue from sale of Decaf Columbian) | 8,671 | |
Differential income from further processing Decaf Columbian per batch | $1,169 |
(b) Abica should produce and sell Decaf as $1,169 will be earned more by selling Decaf At $12 per pound.
.
(c) Price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian:
= Net Profit after further processing / Volume of decaf columbian
= 1,169 / (4,100 - 5%)
= 1,169 / 3,895
= 0.30
Price should be reduced by $0.30 for no extra Profit.
Price should be $12 - $0.30 = $11.70
Price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian:: $11.70