Question

Rise N' Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $5.50 per pound. Columbian coffee can be sold without further processing for $9.22 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.88 per pound. The processing into Decaf Columbian requires additional processing costs of $10,230 per batch. The additional processing also causes a 5% loss of product due to evaporation.
Required:
a. Prepare a differential analysis dated October 6 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).
b. Should Rise N' Shine sell Columbian coffee or process further and sell Decaf Columbian?
c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.

Answer 1

Answer:

Rise N' Shine Coffee Company

a. Differential Analysis dated October 6:

                              Alternative 1                      Alternative 2

Sales revenue     $55,320 (6,000 * $9.22)   $67,716 (5,700 * $11.88

Costs:

Cost of product     33,000 (6,000 * $5.50)    33,000 (6,000 * $5.50)

Batch cost                                                         10,230

Evaporation loss                                                 1,650

Total costs          $33,000                             $44,880

Profit                   $22,320                             $22,836

b. Rise N' Shine should process further before selling Decaf Columbian.

c. If the price of Decaf Columbian coffee were $11.79 ($11.88 - $516/5,700), it will cause neither an advantage nor a disadvantage for processing the Columbian coffee further.

Explanation:

a) Data and Calculations:

Total quantity of materials required = 6,000 pounds

Cost price of each pound = $5.50

Selling price of Columbian coffee without further processing = $9.22

Selling price of Decaf Columbian coffee with further processing = $11.88

Costs of additional processing:

Batch cost = $10,230

Evaporation loss = 5% of 6,000 (300) = $1,650

Differential Analysis dated October 6:

                              Alternative 1                      Alternative 2

Sales revenue     $55,320 (6,000 * $9.22)   $67,716 (5,700 * $11.88

Costs:

Cost of product     33,000 (6,000 * $5.50)    33,000 (6,000 * $5.50)

Batch cost                                                         10,230

Evaporation loss                                                 1,650

Total costs          $33,000                             $44,880

Profit                   $22,320                             $22,836

Difference = $516 ($22,836 - $22,320)