Question
In: Accounting
Bow Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches....
- Bow Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or processed further for $16 to make the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or processed further for $28 to make the end product refined sugar that is sold for $79. You may assume Bow has NO fixed costs.
Required:
How much is the financial advantage or disadvantage (clearly indicate whether it is an advantage or disadvantage) of processing beet fiber into industrial fiber?
How much is the financial advantage or disadvantage (clearly indicate whether it is an advantage or disadvantage) of processing beet juice into beet sugar? Assume that instead of buying beets from farmers and crushing them, Bow can instead purchase beet juice for $32, process it for $28 and sell refined sugar as its only product for $79.
How much would be the financial advantage or disadvantage (clearly indicate whether it is an advantage or disadvantage) of ceasing crushing operations and the processing/sale of industrial fiber?
Solutions
Expert Solution
1.)
Sales price before processing- old (beet fiber) = $25
Sales price of industrial fiber-new =$39
Incremental cost = $16
Financial advantage/disadvantage = New selling price – incremental cost – Old selling price
= $39 - $16 -$25
= -$2
Therefore, financial disadvantage of processing beet fiber into industrial fiber is $2.
2.)
Sales price before processing- old (beet juice) = $32
Sales price of refined sugar-new =$79
Incremental cost = $28
Financial advantage/disadvantage = New selling price – incremental cost – Old selling price
= $79 - $28 -$32
= $19
Therefore, financial advantage of processing beet juice into refined sugar is $19.
3.)
- Net advantage from crushing operations and further processing
= Disadvantage from industrial fiber + Advantage from refined sugar
= -$2 + $19 = $17 advantage
- Financial advantage or disadvantage from purchasing beet juice instead of crushing:
Cost of beet juice = $32
Sales price of refined sugar-new =$79
Incremental cost = $28
Financial advantage or disadvantage= Sales price – initial cost – incremental cost
= $79 - $28 -$32
=$19
- The financial advantage or disadvantage of ceasing crushing operations and the processing/sale of industrial fiber:
= Financial advantage or disadvantage from purchasing beet juice instead of crushing - Net advantage from crushing operations and further processing
= $19 - $17
=$2 Advantage
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