Sell or Process Further
Zanda Drug Corporation buys three chemicals that are processed to produce two types of analgesics used as ingredients for popular over-the-counter drugs. The purchased chemicals are blended for 2 to 3 hours and then heated for 15 minutes. The results of the process are two separate analgesics, depryl and pencol, which are sent to a drying room until their moisture content is reduced to 6 to 8%. For every 1,300 pounds of chemicals used, 600 pounds of depryl and 600 pounds of pencol are produced. After drying, depryl and pencol are sold to companies that process them into their final form. The selling prices are $12 per pound for depryl and $30 per pound for pencol. The costs to produce 600 pounds of each analgesic are as follows:
The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is $1.30. Shipping costs $0.10 per pound.
Zanda could process depryl further by grinding it into a fine powder and then molding the powder into tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route were taken, the revenue received per bottle of tablets would be $4.00, with 10 bottles produced by every pound of depryl. The costs of grinding and tableting total $2.50 per pound of depryl. Bottles cost $0.40 each. Bottles are shipped in boxes that hold 25 bottles at a shipping cost of $1.60 per box.
Required:
- 1. CONCEPTUAL CONNECTION Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets?
- 2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further?
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Chapter 8 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
- Taylor Company produces two industrial cleansers that use the same liquid chemical input: Pocolimpio and Maslimpio. Pocolimpio uses two quarts of the chemical for every unit produced, and Maslimpio uses five quarts. Currently, Taylor has 6,000 quarts of the material in inventory. All of the material is imported. For the coming year, Taylor plans to import 6,000 quarts to produce 1,000 units of Pocolimpio and 2,000 units of Maslimpio. The detail of each products unit contribution margin is as follows: Taylor Company has received word that the source of the material has been shut down by embargo. Consequently, the company will not be able to import the 6,000 quarts it planned to use in the coming years production. There is no other source of the material. Required: 1. Compute the total contribution margin that the company would earn if it could import the 6,000 quarts of the material. 2. Determine the optimal usage of the companys inventory of 6,000 quarts of the material. Compute the total contribution margin for the product mix that you recommend. 3. Assume that Pocolimpio uses three direct labor hours for every unit produced and that Maslimpio uses two hours. A total of 6,000 direct labor hours is available for the coming year. a. Formulate the linear programming problem faced by Taylor Company. To do so, you must derive mathematical expressions for the objective function and for the materials and labor constraints. b. Solve the linear programming problem using the graphical approach. c. Compute the total contribution margin produced by the optimal mix.arrow_forwardPharmaco Corporation buys three chemicals that are processed to produce two popular ingredients for liquid pain relievers. The three chemicals are in liquid form. The purchased chemicals are blended for two to three hours and then heated for 15 minutes. The results of the process are two separate ingredients, PR1 and PR2. For every 4,300 gallons of chemicals used, 2,000 gallons of each pain reliever are produced. The pain relievers are sold to companies that process them into their final form. The selling prices are 34 per gallon for PR1 and 45 per gallon for PR2. The costs to produce one batch (containing 2,000 gallons of each chemical) are as follows: The pain relievers are bottled in five-gallon plastic containers and shipped. The cost of each container is 2.10. The costs of shipping are 0.50 per container. Pharmaco Corporation could process PR1 further by mixing it with inert powders and flavoring to form tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route is taken, the revenue received per case of tablets would be 13.50, with eight cases produced by every gallon of PR 1. The costs of processing into tablets total 11.00 per gallon of PR1. Packaging costs 5.16 per case. Shipping costs are 1.68 per case. Required: 1. Should Pharmaco sell PR1 at split-off, or should PR1 be processed and sold as tablets? 2. If Pharmaco normally sells 26,000 gallons of PR1 per year, what will be the difference in profits if PR1 is processed further?arrow_forwardSell or process further Dakota Coffee Company produces Columbian coffee in batches of 7,500 pounds. The standard quantity of materials required in the process is 7,500 pounds, which cost 6.00 per pound. Columbian coffee can be sold without further processing for 9.80 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for 11.60 per pound. The processing into Decaf Columbian requires additional processing costs of 6,300 per batch. The additional processing will also cause a 5% loss of product due to evaporation. a. Prepare a differential analysis dated December 11 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2). b. Should Dakota Coffee Company sell Columbian coffee or process further and sell Decaf Columbian? Explain. c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.arrow_forward
- Vollmer Manufacturing makes three components for sale to refrigeration companies. The components are processed on two machines: a shaper and a grinder. The times (in minutes) required on each machine are as follows: The shaper is available for 120 hours, and the grinder for 110 hours. No more than 200 units of component 3 can be sold, but up to 1,000 units of each of the other components can be sold. In fact, the company already has orders for 600 units of component 1 that must be satisfied. The profit contributions for components 1, 2, and 3 are 8, 6, and 9, respectively. a. Formulate and solve for the recommended production quantities. b. What are the objective coefficient ranges for the three components? Interpret these ranges for company management. c. What are the right-hand-side ranges? Interpret these ranges for company management. d. If more time could be made available on the grinder, how much would it be worth? e. If more units of component 3 can be sold by reducing the sales price by 4, should the company reduce the price?arrow_forwardCashion Company produces chemical mixtures for veterinary pharmaceutical companies. Its factory has four mixing lines that mix various powdered chemicals together according to specified formulas. Each line can produce up to 5,000 barrels per year. Each line has one supervisor who is paid 34,000 per year. Depreciation on equipment averages 16,000 per year. Direct materials and power cost about 4.50 per unit. Required: 1. Prepare a graph for each of these three costs: equipment depreciation, supervisors wages, and direct materials and power. Use the vertical axis for cost and the horizontal axis for units (barrels). Assume that sales range from 0 to 20,000 units. 2. Assume that the normal operating range for the company is 16,000 to 19,000 units per year. How would you classify each of the three types of cost?arrow_forwardJonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)arrow_forward
- Clark Kent Inc. buys crypton for $.80 a gallon. At the end of processing in Dept. 1, crypton splits off into products plutonium, tantalum, and xenon. Plutonium is sold at the split-off point with no further processing. Tantalum and xenon require further processing before they can be sold. Tantalum is processed in Dept. 2, and xenon is processed in Dept. 3. Following is a summary of costs and other related data for the year ended December 31: No inventories were on hand at the beginning of the year, and no crypton was on hand at the end of the year. All gallons on hand at the end of the year were complete as to processing. Kent uses the net realizable value method of allocating joint costs. Required: Calculate the allocation of joint costs. Calculate the total cost per unit for each product. In examining the product cost reports, Lois Lane, Vice President—Marketing, notes that the per-unit cost of tantalum is greater than the selling price of $2.75 that can be received in the competitive marketplace. Lane wonders whether they should stop selling tantalum. How did Lane determine that the product was being sold at a loss? What per unit cost should be used in determining whether tantalum should be sold?arrow_forwardBetram 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 $75,000, and the result is 6,200 gallons of anderine and 8,200 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $11.00 per gallon and the dofinol for $6.65 per gallon. Alternatively, the anderine can be processed further at a cost of $8.90 per gallon (of anderine) into cermine. It takes 2 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $59. 2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 540 gallons of anderine that undergo further processing require 20 more purchase orders at $12 each and 13 more quality inspection hours at $22 each. Which alternative would be better and by how much?NOTE: Round interim calculations and your final…arrow_forwardBetram 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 5,900 gallons of anderine and 8,200 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.30 per gallon. Alternatively, the anderine can be processed further at a cost of $7.90 per gallon (of anderine) into cermine. It takes 4 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $65.arrow_forward
- Carina Company produces sanitation products after processing specialized chemicals; Thefollowing relates to its activities:1 Kilogram of chemicals purchased for $2000 and with an additional $1000 isprocessed into 400 grams of Crystals and 80 litres of a Cleaning agent. At split-off, agram of Crystal can be sold for $1 and the Cleaning agent can be sold for $4 per litre.At an additional cost of $400, Carina can process the 400 grams of Crystal into 500grams of Detergent that can be sold for $2 per gram. The 80 litres of Cleaning agent ispackaged at an additional cost of $300 and made into 200 packs of Softener that canbe sold for $2 per pack.1. Should Carina have processed each of the products further? What effect does the allocationmethod have on this decision?arrow_forwardCarina Company produces sanitation products after processing specialized chemicals; Thefollowing relates to its activities: 1 Kilogram of chemicals purchased for $2000 and with an additional $1000 isprocessed into 400 grams of Crystals and 80 litres of a Cleaning agent. At split-off, agram of Crystal can be sold for $1 and the Cleaning agent can be sold for $4 per litre. At an additional cost of $400, Carina can process the 400 grams of Crystal into 500grams of Detergent that can be sold for $2 per gram. The 80 litres of Cleaning agent ispackaged at an additional cost of $300 and made into 200 packs of Softener that canbe sold for $2 per pack.Required:1. Allocate the joint cost to the Detergent and the Softener using the following:a. Sales value at split-off method b. NRV method 2. Should Carina have processed each of the products further? What effect does the allocation method have on this decision?arrow_forwardBetram 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 $70,500, and the result is 5,600 gallons of anderine and 8,300 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $10.00 per gallon and the dofinol for $6.95 per gallon. Alternatively, the anderine can be processed further at a cost of $7.30 per gallon (of anderine) into cermine. It takes 4 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $61. 1. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 520 gallons of anderine that undergo further processing require 18 more purchase orders at $12 each and 16 more quality inspection hours at $22 each. Which alternative would be better and by how much?NOTE: Round interim calculations and your…arrow_forward
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