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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for further processing

The management of International Aluminum Co. is considering whether to process aluminum ingot further into rolled aluminum. Rolled aluminum can be sold for $2,200 per ton, and ingot can be sold without further processing for $1,100 per ton. Ingot is produced in batches of 80 tons by smelting 500 tons of bauxite, which costs $105 per ton of bauxite. Rolled aluminum will require additional processing costs of $620 per ton of ingot, and 1.25 tons of ingot will produce 1 ton of rolled aluminum (due to trim losses).

Instructions

1.    Prepare a differential analysis as of February 5 to determine whether to sell aluminum ingot (Alternative 1) or process further into rolled aluminum (Alternative 2).

2.    Briefly report your recommendations.

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company IA as on February 5 to decide whether to sell ingots or process it further to rolled aluminum.

Explanation

The differential analysis of Company IA as on February 5 for the given alternatives is shown below.

Differential Analysis of Company IA
Sell Ingot (Alt. 1) or Process Further to Rolled Aluminum (Alt. 2)
February 5
Sell Ingot   (Alternative 1)  Process Further   to Rolled Aluminum (Alternative 2) Differential Effect on income
Revenues, per batch (1)        $88,000 (2)        $140,800 $52,800
Costs, per batch (3)  (-)  $52,500 (4)  (-)  $102,100 (-)  $49,600
Income (loss), per batch $35,500 $38,700 $3,200

 Table (1)

The differential analysis of Company IA as on February 5 shows that selling rolled aluminum may increase the income by $3,200; hence ingots should be sold after processing it further to rolled aluminum.

Working Note:

Calculate the revenues per batch from sale of ingots.

Revenue per batch  = $1,100 × 80 tons= $88,000

(1)

Calculate the revenues per batch from processed rolled aluminum

b)

To determine

To Report: The recommendations for Company IA.

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