Question

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 $77,500, and the result is 6,500 gallons of anderine and 7,800 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $10.00 per gallon and the dofinol for $6.30 per gallon. Alternatively, the anderine can be processed further at a cost of $7.50 per gallon (of anderine) into cermine. It takes 3 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $62. Required: 1. Which alternative is more cost effective and by how much

Answer 1

Answer:

Selling at split-off point is more cost effective by $48,750.

Explanation:

Total gallons of  anderine and dofinol = 6,500 + 7,800 = 14,300

Weight of anderline = 6,500 / 14,300 = 0.454545454545455

Anderline share of cost at split-off point = $77,500 * 0.454545454545455 = $35,227.27

Cost per unit anderline = $35,227.27 / 6,500 = $5.42

Split-off point revenue from anderline = 6,500 * $10 = $65,000

Split-off point profit from anderline = $65,000 - $35,277.27 = $29,772.73

Additional processing cost on aderline = 6,500 * $7.50 = $48,750

Total cost of cermine = Anderline share of cost at split-off point + Additional processing cost on aderline = $35,227.27 + $48,750.00 = $83,977.27

Number of cermine = 6,500 / 3 =  2,167

Cost per unit of cermine = $83,977.27 / 2,167 = $38.76

Revenue from cermine = (6,500 / 3) * $62 = $134,333.33

Profit from cermine =  $134,333.33  - $83,977.27 = $50,356.06

Difference between total cost cermine and anderline =  $83,977.27 - $35,227.27 = $48,750

Cost effective means an alternative that requires lower cost.

Therefore, selling at split-off point is more cost effective by $48,750.