Question

Sell or Process Further

Rise N’ Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $6 per pound. Columbian coffee can be sold without further processing for $8.4 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $10 per pound. The processing into Decaf Columbian requires additional processing costs of $8,950 per batch. The additional processing will also cause 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).

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)	$	$	$

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a. For both products, subtract the costs from the revenue per batch. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. Should Rise N’ Shine sell Columbian coffee or process further and sell Decaf Columbian?
Sell 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

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Answer 1

• All working forms part of the answer
• Requirement ‘a’

Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
Oct-06
	Sell Regular	Process Further	Differential
	Columbian	into Decaf Columbian	Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues	$               50,400.00	$                     57,000.00	$            6,600.00
Costs	$              (36,000.00)	$                    (44,950.00)	$           (8,950.00)
Income (Loss)	$               14,400.00	$                     12,050.00	$           (2,350.00)

Working

Differential Analysis
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)
38991
	Sell Regular	Process Further	Differential
	Columbian	into Decaf Columbian	Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues	=6000*8.4	=6000*95%*10
Costs	=-6000*6	=-36000-8950
Income (Loss)	Income (Loss)	Income (Loss)	Income (Loss)

• Requirement ‘b’

Rise N Shine should SELL REGULAR COLUMBIAN. This is because if it further processes it to Decaf Columbian, the Net Income will fall by $ 2350.

• Requirement ‘c’

Let The decaf price be ‘$x’, then, at indifference point, Net Income under both would be equal.

(50400 – 36000) = (5700x – 44950)
14400 = 5700x – 44950
14400 + 44950 = 5700x
59350 = 5700x
x = 59350 / 5700
x = $ 10.41

Answer: $ 10.41 per pound