ADP Mining Company mines an iron ore called Alpha. During the month of August, 4

Question

ADP Mining Company mines an iron ore called Alpha. During the month of August, 408,000 tons of Alpha were mined and processed at a cost of $746,500. 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:

Processing costs to refine Delta into Super Delta are $2,448,000; processing costs to refine Pi into Precision Pi are $652,800.

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

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

c. What is the maximum profit that ADP Mining Company can expect to earn from the production of the 408,000 tons of Alpha?

Delta Super Delta Pi Precision Pi Selling price $ 23 /ton $ 27 /ton $ 26 /ton $ 32 /ton

Explanation / Answer

As per policy only first four questions will be answered

A-1

Quantity of Delta = 408000 tons * 60% = 244800 tons

Differential cost analysis - super delta

Incremental Selling price ($27- $23) = 4

Incremental cost of further processing ( 2448000/244800 gallons) = (10)

Incremental Profit (loss) = (6)

A-2

Quantity of Pi = 408000*40% = 163200

Differential cost analysis - Pi

Incremental Selling price (32-26) =6

Incremental cost of further processing (652800/163200 gallons) = (4)

Incremental Profit (loss) =2

A-3

Option A because processing further results into loss

A-4

Option A in case of Pi processing further results into profit.

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