Question
In: Accounting
Sell or Process Further Abica Coffee Company produces Columbian coffee in batches of 4,100 pounds. The...
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
Solutions
Expert Solution
(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
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