Question

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 $71,500, and the result is 6,300 gallons of anderine and 7,500 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $10.00 per gallon and the dofinol for $7.50 per gallon. Alternatively, the anderine can be processed further at a cost of $7.70 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $55.

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.

- Select your answer -Sell at split-offProcess it furtherItem 1 by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 500 gallons of anderine that undergo further processing require 17 more purchase orders at $8 each and 14 more quality inspection hours at $23 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.

- Select your answer -Sell at split-offProcess it furtherItem 3 by $

Answer 1

	1.)	Joint Cost	$ 71,500
		Split off Point	Quantity	Selling Price per gallon
		Anderine	6,300	10
		Dofinol	7,500	7.5
		Allocation of Joint cost in ratio of Sales value at split off point:-
		Sale at Split off Point
		Anderine	63,000	( 6,300 x 10 )
		Dofinol	56,250	(7,500 x 7.5 )
		Total	119,250
		Allocated Joint Cost
		Anderine	37,774	( 71,500 x 63,000 ) / 119,250
		Dofinol	33,726	( 71,500 x 56,250 ) / 119,250
		Total Joint Cost	71,500
		Alternative 1: Sale of Anderine at Split off Point:-
		Profit = Sales - Allocated Joint Cost
		= 63,000 - 37,774
		= $ 25,226
		Alternative 2: Sale of Anderine after further processing i.e. sale of Cermine:-
		Profit = Sales after processing - Processing Cost -Allocated Joint Cost
		= ( 2,100 x 55 ) - ( 7.70 x 6,300 ) - 37,774
		= 115,500 - 48,510 - 37,774
		= $ 29,216
		Alternative 2 is more cost effective , because it has more profit than selling at split off point of Anderine.
	2.)	Alternative 1: Sale of Anderine at Split off Point:-
		Profit = Sales - Allocated Joint Cost
		= 63,000 - 37,774
		= $ 25,226
		Alternative 2: Sale of Anderine after further processing i.e. sale of Cermine:-
		Profit = Sales after processing - Additional purchasing cost - Additional quality inspection cost -Processing Cost -Allocated Joint Cost
		= ( 2,100 x 55 ) - ( (6,300 x 136)/ 500 ) - ( (6,300 x 322 )/ 500 ) - ( 7.70 x 6,300 ) - 37,774
		= 115,500 -1,713.60 - 4,057.20 - 48,510 - 37,774
		= $ 23,445
		Alternative 1 is more cost effective , because it has more profit than selling after further processing of Anderine.