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, 409,000 tons of Alpha were mined and processed at a cost of $747,000. 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: Super Delta $29 /ton Pi $27 /ton Precision Pi $33 /ton Selling price $25 /ton Processing costs to refine Delta into Super Delta are S2,699,400; processing costs to refine Pi into Precision Pi are $490,800 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.) cremental Profit (Loss) a-2. What would be the incremental profit or loss per unit if Pi is refined into Precision Pi? cremental Profit (Loss)

Explanation / Answer

ADP Mining Company

1a. Determination of incremental profit or loss per unit if Delta is refined into Super Delta:

Incremental profit or loss = incremental revenue – incremental cost

Incremental revenue = selling price of Super Delta – Selling price of Delta

Selling price of Delta = $25 per ton

Selling price of Super Delta = $29 per ton

Incremental revenue per ton = $29 -$25 = $4

Incremental cost per ton = total processing cost of refining/output

Total processing cost to refine Delta to Super Delta = $2, 699,400

Output - Delta = total Alpha output x 60% = 409,000 tons x 60%

Delta output = 245,400 tons

Processing cost per ton = $2,699,400/245,400 = $11 per ton

Incremental loss = $4 - $11 = -$7 per ton

Hence, on processing Delta to Super Delta would result in incremental loss of $7 per ton.

1b. Determination of incremental profit or loss per unit if Pi is refined into Precision Pi:

Incremental profit or loss = incremental revenue – incremental cost

Incremental revenue = selling price of Precision Pi – Selling price of Pi

Selling price of Pi = $27 per ton

Selling price of Precision Pi = $33 per ton

Incremental revenue per ton = $33 -$27 = $6

Incremental cost per ton = total processing cost of refining/output

Total processing cost to refine Pi to Precision Pi = $490,800

Output - Pi = total Alpha output x 40% = 409,000 tons x 40%

Pi output =163,600 tons

Processing cost per ton = $490,800/163,600 = $3 per ton

Incremental profit = $6 - $3 = $3 per ton

Hence, on processing Pi to Precision Pi the company makes an incremental profit of $3 per ton.

Maximum expected profit = maximum expected profit of Delta + maximum expected profit of Precision Pi

Since, processing of Delta to Super Delta would result in a loss of $7 per ton, the ideal decision would be to sell Delta without further processing.

Since, processing of Pi to Precision Pi would result in an incremental profit of $3 per ton, the ideal decision would be to process Pi into Precision Pi.

So, Delta Sales = selling price per unit x output of Delta

Selling price per ton = $25

Output of Delta = 409,000 x 60% = 245,400 tons

Delta Sales = $6,135,000

Precision Pi incremental profit = incremental profit per ton x output of Precision Pi

Incremental profit = $3 per ton

Pi output = 163,600 tons

Incremental profit of Precision Pi = $3 x 163,600 = $490,800

Total revenue =$490,800 + 5,398,800 = $5,889,600

Less: processing cost                       = $747,000

Profit                                                   = $5,142,600

Hence, ADP Mining Company would make maximum profit of $5,142,600 by opting to sell Delta without further processing and sell Pi after processing the same to Precision Pi.

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