Sell or Process Further Abica Roast Coffee Company produces Columbian coffee in

Question

Sell or Process Further
Abica Roast Coffee Company produces Columbian coffee in batches of 5,400 pounds. The standard quantity of materials required in the process is 5,400 pounds, which cost $4.00 per pound. Columbian coffee can be sold without further processing for $8.40 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $10.00 per pound. The processing into Decaf Columbian requires additional processing costs of $9,750 per batch. The additional processing will also cause a 5% loss of product due to evaporation.

Sell or Process Further Abica Roait Coffee Company produces Columbian coffee in batches of 5,400 pounds. The standard quantity of materials required in the process is 5,400 pounds, which cost $4.00 per pound. Columbian coffee can be sald witheut further processing pound. Jo umban co ee an ais be processed furt erto yield Decaf Columbian, which can be sold or S10.00 per pound Th. process ng·to Deca Columbian e unes additions process ng cons or S9 750 per batch. Te additio a proces ng a loss nt product due toaperwon. far $8-40 per auses

Explanation / Answer

a. Differencial Analysis (per batch):

Self regular columbian

(alternative 1)

Process further

(Alternative 2)

Differential effect on income

(Alternative2 - alternative1)

=5130*10 =$51300

(#refer note)

=$(5400*4) + $9750

=$31,350

# Note: since there would be a loss of 5% in Alternative 2, quantity available for sale would be = 5400*0.95 =5130 pounds.

b. should roast and sell columbian coffee.

c. Selling price of Decaf columbian that would create indifference between the two options =

(total costs under Alternative 2 + Profit under Alternative 1) / no of units under Alternative 2

= ($31,350 + $23,760) / 5130 = $10.75 per pound

Particulars

Self regular columbian

(alternative 1)

Process further

(Alternative 2)

Differential effect on income

(Alternative2 - alternative1)

Revenues =5400*8.4 = $45,360

=5130*10 =$51300

(#refer note)

= $5940 Costs =5400*4 = $21,600

=$(5400*4) + $9750

=$31,350

=$9,750 Income $23760 $19,950 ($3,810) loss

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