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Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs Betram Chemicals Company processes a number...

Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs

Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $70,000, and the result is 6,000 gallons of anderine and 8,000 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.05 per gallon. Alternatively, the anderine can be processed further at a cost of $7.60 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $61.

Required:

1. Which alternative is more cost effective and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

Process it further by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 520 gallons of anderine that undergo further processing require 21 more purchase orders at $12 each and 16 more quality inspection hours at $22 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

Sell at spit-off by $

Solutions

Expert Solution

1. However Alternative 2 is better since it results in net incremental revenue of $4400.Alternative 1 is more cost effective by $45600. This means that the additional processing cost= $45600.

This is computed below as

Alternative 1:

Cost= $70,000

Revenues from anderine= 6000*$12= $72000

Revenue from dofinol= 8000*$6.05= $48400

Net revenue= 72000+48400- 70000 = $50,400

Alternative 2:

Cost= $70,000

Cost of processing anderine= 6000*7.6 = $45600

Revenue from dofinol= 8000*$6.05= $48400

Revenue from cermine= 6000*1/3 * 61= $122000

Net revenue= 48400+122000-70000-45600

=$ 54800

2. Alternative 1 is better now by $2569.23 (50400-47830.77)

Alternative 1:

Cost= $70,000

Revenues from anderine= 6000*$12= $72000

Revenue from dofinol= 8000*$6.05= $48400

Net revenue= 72000+48400- 70000 = $50,400

Alternative 2:

Cost= $70,000

Cost of processing anderine= 6000*7.6 = $45600

Cost of additional purchasing= 6000/520 * 21*12 =$ 2907.69

Cost of inspection= 6000/520 *16*22 = $ 4061.54

Revenue from dofinol= 8000*$6.05= $48400

Revenue from cermine= 6000*1/3 * 61= $122000

Net revenue= 48400+122000-70000-45600- 2907.69- 4061.54

=$ 47830.77

jeff jeffy answered 2 years ago
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