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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Structuring the Sell-or-Process-Further Decision

Bart’s Butters receives 1,000,000 containers of raw milk each period that it subsequently processes into consumable milk by adjusting the fat content, adding vitamins, and destroying any potentially harmful bacteria. For Bart’s, one container equals one gallon of consumable milk. Bart’s then must decide whether to sell its consumable milk at split-off or to process it further into butter. Bart’s normally sells consumable milk for a per-gallon price of $3. Alternately, each gallon of milk can be processed further into one-half tub of butter (i.e., one gallon of milk equals 0.5 gallon of butter) at an additional cost of $1.50 per tub of butter. Also, butter can be sold for $6.00 per tub.

Required:

  1. 1. What is the contribution to income from selling the consumable milk?
  2. 2. What is the contribution to income from processing the consumable milk into butter?
  3. 3. Should Bart’s continue to sell the consumable milk or process it further into butter?

1.

To determine

Calculate the amount of contribution to the income from selling the consumable milk.

Explanation

Sell-or-Process-Further Decision:

Sell-or-process further decision can be defined as the analysis of relevant costing which emphasizes on decision making regarding whether to process the product beyond its split-off point.

Use the following formula to calculate the revenue from the sale of consumable milk:

Revenue=Containers of milk×Sale price

Substitute 1,000,000 for the containers of milk and $3 for sale price per container in the above formula

2.

To determine

Calculate the amount of contribution to the income from processing the consumable milk into butter.

3.

To determine

Describe whether Person B should continue selling the consumable milk or process it further into butter.

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