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 $74,000, and the result is 6,000 gallons of anderine and 8,000 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $11 per gallon and the dofinol for $6.75 per gallon. Alternatively, the anderine can be processed further at a cost of $8 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $60.

Required:

2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 500 gallons of anderine that undergo further processing require 20 more purchase orders at $10 each and 15 more quality inspection hours at $25 each. Which alternative would be better and by how much?

Sell at split-off by $

Explanation / Answer

If Products are sold at split off point Anderine Dofinol Sale value at split off point 66000 54000 (6000*11) (8000*6.75) Less: Cost of processing 40700 33300 (allocated in the ratio of 66:54) Profit at split off point 25300 20700 If products are sold after split off point Anderine Units of Cermine Produced (6000/3) 2000 *selling price per gallon 60 Total sales revenue 120000 Less: Cost of processing (6000*$8) 48000 Less: Purchase orders 2400 (6000/500*20*$10) Less: Quality inspection hours 4500 (6000/500*15*$25) Less: Cost of processing anderine 40700 Profit after further processing 24400 So profit after further processing of anderine is $24,400 while profit at split off point is $25,300. So Anderine should be sold at split off point and company is better off by $900

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.