Question

Zing Coffee Company produces Columbian coffee in batches of 6,500 pounds. The standard quantity of materials required in the process is 6,500 pounds, which cost $6 per pound. Columbian coffee can be sold without further processing for $9 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12 per pound. The processing into Decaf Columbian requires additional processing costs of $10.230 per batch. The additional processing will also cause a 5% loss of product due to evaporation.
a. Prepare a differential analysis dated October 6, 2014 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).
b. Determine the price of Deaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.

Answer 1

Answer:

Zing Coffee Company

a. Differential Analysis:

                     Sell Regular        Process Further    Differential Effect

                              Columbian      Into Decaf              On Income

                          (Alternative 1)        (Alternative 2)          Alternative (2)

Revenues        $58,500                 $74,100                  $15,600

Costs                  39,000                  49,230                     10,230

Income (loss)         $19,500                $24,870                    $5,370

b. The Price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian is:

= $11.18 approx.

Explanation:

a) Data and Calculations:

Production batches = 6,500

Standard quantity of materials required in the process = 6,500 pounds

Cost of unit = $6

Total cost = $39,000

Selling price of regular Columbian coffee = $9 per pound

Revenue from regular Columbian coffee = $58,500

Selling price of Decaf Columbian coffee = $12 per pound

Additional processing costs = $10,230 per batch

Total cost after further processing = $49,230 ($39,000 + $10,230)

Loss during further processing = 5% of 6,500 = 325

Total quantity of Decaf Columbian coffee = 6,175

Total Sales revenue = $74,100 ($12 * 6,175)

Differential Analysis:

                     Sell Regular        Process Further    Differential Effect

                              Columbian      Into Decaf              On Income

                          (Alternative 1)        (Alternative 2)          Alternative (2)

Revenues        $58,500                 $74,100                  $15,600

Costs                  39,000                  49,230                     10,230

Income (loss)         $19,500                $24,870                    $5,370

Price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian is computed as follows:

Estimated revenue of the Decaf = $68,730 ($19,500 + $49,230)

Estimated selling price = $11.18 ($68,730/6,150)