Question

Vihaan Chemicals Company processes a number of chemical compounds used in disinfecting health club fitness equipment. One compound is decomposed into two chemicals: flexalene and soreaphine. The cost of processing one batch of compound is $75,000, and the result is 6,400 gallons of flexalene and 8,000 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $12.00 per gallon and the soreaphine for $6.15 per gallon. Alternatively, the flexalene can be processed further at a cost of $8.40 per gallon (of flexalene) into lactine. It takes 2 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $63.
Required: 1. Which alternative is more cost effective and by how much? NOTE: DO NOT round interim calculations and, if required, round your answer to the nearest dollar. by $ 2. What if the production of flexalene into lactine required additional purchasing and quality inspection activity? Every 550 gallons of flexalene that undergo further processing require 22 more purchase orders at $10 each and 18 more quality inspection hours at $26 each. Which alternative would be better and by how much? NOTE: Round interim calculations and your final answer to the nearest cent. by $_______.

Answer 1

Answer:

Vihaan Chemicals Company

1. The more cost-effective alternative is to process Flexalene further into Lactine.  The gain for further processing is $71,040.

2. The better alternative is to process Flexalene further into Lactine.  The gain for further processing is now $63,034.

Explanation:

a) Data and Calculations:

Cost of processing one batch of compound = $75,000

Result of processing the compound:

                                                   Flexalene     Soreaphine

Gallons processed                        6,400            8,000

Split-off selling price per unit     $12.00             $6.15

Further processing cost per gal. $8.40

Selling price of Lactine = $63 per gallon

Sales revenue from Sale of Flexalene at split-off = $76,800

Net Sales revenue from Sale of Lactine after further processing of Flexalene = $147,840 ($63 * 6,400/2) - ($8.40 * 6,400)

Gain from further processing of Flexalene into Lactine = $71,040 ($147,840 - $76,800)

2. Additional costs for further processing:

Purchasing order cost =  $2,560 (6,400/550 * 22 * $10)

Quality inspection cost = $5,446 (6,400/550 * 18 * $26)

Total additional costs =   $8,006

Gain from further processing of Flexalene into Lactine = $63,034 ($147,840 - $76,800 - $8,006)