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Managerial Accounting: The Corners...

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

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Managerial Accounting: The Corners...

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

Chapter 8, Problem 58P, Sell or Process Further Zanda Drug Corporation buys three chemicals that are processed to produce

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. 1. CONCEPTUAL CONNECTION Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets?
  2. 2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further?

1.

To determine

Describe whether Company Z should sell the depryl at split-off or process further.

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.

The following table represents the appropriate decision to sell or process the depryl:

CostsAlternativesDifference ($)
Process further ($)Sell ($)
Revenues124,0007,20016,800
Bags2 (39)39
Shipping3(384)(60)(324)
Grinding4(1,500) (1,500)
Bottles5(2,400) (2,400)
Operating income19,7167,10112,615

Table (1)

The operating income to process the depryl is $19,716 which is more than the operating income to sell the depryl by $12,615. Therefore, the company should process depryl further.

Working Notes:

1. Calculation of revenues to process the depryl further:

Revenue=(Depryl unit×Number of depryl bottles×Amount per bottle of tablet)=600pounds×10bottles×$4=$24,000

Hence, the amount of revenue is $24,000.

Calculation of revenues after the sale:

Revenue=Depryl units×Selling price per pound=600pounds×$12=$7,200

Hence, the amount of revenue after the sale is $7,200.

2. Calculation of bags sold:

Amount of bags=(Depryl units×Cost of bagPacked units)=(600pounds×$1

2.

To determine

Calculate the amount difference in profits if the depryl is processed further and the company sells 265,000 pounds of depryl per year.

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