The management of Delta Sugar Company is considering whether toprocess further r

Question

The management of Delta Sugar Company is considering whether toprocess further raw sugar into refined sugar. Refined sugarcan be sold for $1.75 per pound, and raw sugar can be sold withoutfurther processing for $1.05 per pound. Raw sugar is producedin batches of 24,000 pounds by processing 90,000 pounds of sugarcane, which costs $0.25 per pound. Refined sugar will requireadditional processing costs of $0.36 per pound of raw sugar, and1.2 pounds of raw sugar will produce 1 pound of refined sugar.

Instructions:

Note: 1. Differential revenue, $9,800

Explanation / Answer

           Delta sugar company                  Additional processing decision                  Incremental Analysis                              Rawsugar                              Refinedsugar                  Difference in favor to refine                           (24,000 pounds)          (20,000 pounds)                    Sales    25,200          35,000             $ 9,800 Processing cost    6,000          7,200          (1,200)           (0.25 * 24,000) (0.36 * 20,000) Totals    19,200          27,800             8,600 Note Calculation of pounds for refined sugar 24,000 / 1.2 = 20,000 pounds 2. It is recommended to process further and refine the sugar sincethe company would make $ 8,600 more of contribution margin.

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