Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs Betr

Question

Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs

Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $74,500, and the result is 5,800 gallons of anderine and 7,500 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $9.00 per gallon and the dofinol for $7.00 per gallon. Alternatively, the anderine can be processed further at a cost of $7.40 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $65.

Required:

1. Which alternative is more cost effective and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

by $

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 560 gallons of anderine that undergo further processing require 22 more purchase orders at $11 each and 14 more quality inspection hours at $22 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.

by $

Explanation / Answer

Alternative-1 Statement Showing Analysis of Sell Andreno at Split off point or After Split Off Particular At Split Off After Split Off Incremental Sales Prcie $27.00 $65.00 Processing ($7.40*3) $22.20 Profit $27.00 $42.80 $15.80 Note: At Split Off Point Sale Price taken for 3 Gallon Above Analysis shows thate incremental revenue come as Positive , Hence it's profitable to sell the adreno after Split off point Alternative -2 Computation of Net Revenue per 3 Gallon after split off Sale Price $65.00 Processing ($7.40*3) $22.20 Addition cost for Purchase Order $1.30 (22*$11/590*3) Additional Cost for Quality inspection $1.65 (14*$22/560*3) Net Gain $39.85 Alternative -1 is better because due to additional cost incurrent profit has decreased

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