Question

Differential Analysis for Further Processing

The management of Dominican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $2.08 per pound, and raw sugar can be sold without further processing for $1.16 per pound. Raw sugar is produced in batches of 32,400 pounds by processing 81,000 pounds of sugar cane, which costs $0.29 per pound of cane. Refined sugar will require additional processing costs of $0.44 per pound of raw sugar, and 1.2 pounds of raw sugar will produce 1 pound of refined sugar.

Required:

1. Prepare a differential analysis as of March 24 to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2). If required, do not round interim calculations.

Differential Analysis
Sell Raw Sugar (Alt. 1) or Process Further into Refined Sugar (Alt. 2)
March 24
	Sell Raw Sugar (Alternative 1)	Process Further into Refined Sugar (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per batch
Costs, per batch
Income (Loss), per batch

Answer 1

	Alternative 1.
	Selling Raw sugar
	Raw sugar Price /lb =$1.16
A	Revenue from a Batch of 32,400 lb=32400*1.16=	$           37,584.00
	Expenses for a batch of 32,400 lb Raw sugar:
B	Sugar cane cost (81,000 lb @ $0.29/lb )	$           23,490.00
C	Net Income from 32,400 lb of Raw sugar =A-B=	$           14,094.00

	Alt 2.
	Further processing to refined sugar;
	Qty of Refined sugar (lb) production per 32,400 (1 batch) of Raw sugar=32,400/1.2=	27,000.00	lb
	Selling price per lb of refined sugar =$2.08
D	Total Sale value of 27,000 lb refined sugar =	$             56,160.0
	Expenses of further processing 32,400 lb raw sugar:
	Additional processing cost of $0.44/lb of raw sugar=32,400*0.44=	$                14,256
	Add: Sugar cane cost to produce 32,400 lb raw sugar=	$                23,490
E	Total cost of Prducing 27,000 lb of refined sugar	$                37,746
F	Net Income in Further processing to Refined sugar=D-E=	$                18,414
G	Incremental Income on Further processing =F-C	$                  4,320
	As the incremental income from further processing is positive, it is better
	to go for further processing.