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 $73,000, and the result is 5,600 gallons of anderine and 7,600 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $13.00 per gallon and the dofinol for $7.45 per gallon. Alternatively, the anderine can be processed further at a cost of $7.50 per gallon (of anderine) into cermine. It takes 2 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $65.
Required:
1. List the relevant benefits and costs for each alternative.
2. Which alternative is more cost effective and by how much?
3. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 500 gallons of anderine that undergo further processing required 20 more purchase orders at $10 each and 15 more quality inspection hours at $25 each. Which alternative would be better and by how much?

Answer 1

Answer:

Betram Chemicals Company

1. Relevant benefits and costs for each alternative:

                             Sale at split-off         Sale after

                                                       further processing

Revenue                   $129,420            $238,620

Joint Costs                   73,000                 73,000

Cost for further processing -                   42,000

Gross profit               $56,420             $123,620

Additional profit         $0                       $67,200

2. Further processing of Anderine is more cost-effective by $67,200.

3. Further processing of Anderine is still better by $60,760.

Explanation:

a) Data and Calculations:

                                   Anderine     Dofinol      Cermine   Total Costs

Gallons                         5,600          7,600       $73,000     $73,000

Selling price per gal.  $13.00          $7.45

Sales revenue           $72,800     $56,620                        $129,420

Gross profit                                                                          $56,420

Further processing                                         $42,000

Total costs of production                              $115,000      $115,000

Output                      (5,600)            7,600         2,800

Selling price per gallon                    $7.45         $65

Sales revenue                              $56,620     $182,000 $238,620

Gross profit                                                                        $123,620

Profit from further processing:

Gross profit with further processing  $123,620

Gross profit before further processing 56,420

Additional profit                                   $67,200

1. Relevant benefits and costs for each alternative:

                             Sale at split-off         Sale after

                                                       further processing

Revenue                   $129,420            $238,620

Joint Costs                   73,000                 73,000

Cost for further processing -                   42,000

Gross profit               $56,420             $123,620

Additional profit         $0                       $67,200 ($123,620 - $56,420)

What if:

Purchasing order cost (5,600/500 * 20 * $10) = $2,240

Quality inspection cost (5,600/500 * 15 * $25) = $4,200

Additional costs = $6,440

Reduced additional profit = $60,760 ($67,200 - $6,440)