Question

ADP Mining Company mines an iron ore called Alpha. During the month of August, 418,000 tons of Alpha were mined and processed at a cost of $751,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are as follows:

	Delta			Super Delta			Pi			Precision Pi
Selling price	$	21	/ton	$	23	/ton	$	20	/ton	$	24	/ton

Processing costs to refine Delta into Super Delta are $3,260,400; processing costs to refine Pi into Precision Pi are $501,600.

Required:

a-1. What would be the incremental profit or loss per unit if Delta is refined into Super Delta? (Loss amounts should be indicated with a minus sign.)

a-2. What would be the incremental profit or loss per unit if Pi is refined into Precision Pi?

a-3. Should Delta be sold as is or refined into Super Delta?

	a. Delta should be sold as is.
	b. Delta should be processed further and sold as Super Delta.

a-4. Should Pi be sold as is or refined into Precision Pi?

	a. Pi should be processed further and sold as Precision Pi.
	b. Pi should be sold as is.

b. Identify any costs in the problem that are not relevant to this decision.

	a. The $751,500 cost incurred to produce the Alpha ore is not relevant.
	b. Processing costs to refine Delta into Super Delta are not relevant.
	c. Processing costs to refine Pi into Precision Pi are $501,600 not relevant.

c. What is the maximum profit that ADP Mining Company can expect to earn from the production of the 418,000 tons of Alpha?

Answer 1

Answer a-1:

418,000 tons of Alpha were mined and 60% of the Alpha output becomes Delta and 40% becomes Pi

Hence quantity of Delta = 418,000 * 60% = 250,800

Selling Price of Delta = $21 per ton

Selling Price of Super Delta = $23 per ton

Processing costs to refine Delta into Super Delta = $3,260,400

Incremental loss per unit if Delta is refined into Super Delta = - $11, as calculated below:

Answer a-2:

Hence quantity of Pi = 418,000 * 40% = 167,200

Selling Price of Pi = $20 per ton

Selling Price of Precision Pi = $24 per ton

Processing costs to refine Delta into Super Delta = $501,600

Incremental profit per unit if Pi is refined into Precision Pi = $1, as calculated below:

Answer a-3:

a. Delta should be sold as is.

Explanation: As we observe in answer to question a-1 above, incremental loss per ton of - $11 is incurred when Delta is processed further and sold as Super Delta. Hence no further processing should be done and Delta should be sold as is.

Answer a-4:

a. Pi should be processed further and sold as Precision Pi.

Explanation: As we observe in answer to question a-2 above, ADP Mining Company  can earn incremental profit per ton of $1 when it processes Pi further and sell Precision Pi. Hence Pi should be processed further and sold as Precision Pi.

Answer b:

a. The $751,500 cost incurred to produce the Alpha ore is not relevant.

Explanation:

As the decision to be evaluated is whether to process further the outputs of processing Alpha viz. Delta and Pi to produce Super Delta and Precision Pi, respectively, the processing cost of Alpha is not relevant.

Option b: Processing costs to refine Delta into Super Delta is relevant to decide whether to refine Delta into Super Delta or not and hence is not the correct option.

Option c: Processing costs to refine Pi into Precision Pi is relevant to decide whether to refine Pi into Precision Pi or not and hence is not the correct option.

Answer c:

As we observe from answers to question a-1 and a-2 above, maximum profit can be earned by processing alpha into Delta ( 60% output) and Pi and further processing Pi(40% output) and selling Precision Pi.

Maximum profit that ADP Mining Company can expect to earn from the production of the 418,000 tons of Alpha is calculated as follows: