EX25-11. Seattle Roast Coffee Company produces Columbian coffee in batches of
8,000pounds. The standard quantity of materials required in the process is
8,000pounds,which cost $5.00per pound.Columbian coffee can be sold without further
processing for $10.80per pound. Columbian coffee can also be processed further to yield
Decaf Columbian, which can be sold for $12.50per pound.The processing into Decaf
Columbian requires additional processing costs of $10,500per batch. The additional
processing will also cause a 5% loss of product due to evaporation. a. Prepare a
differential analysis report for the decision to sell or process further. b. Should Seattle
Roast sell Columbian coffee or process further and sell Decaf Columbian? c. Determine
the price of Decaf Columbian that would cause neither an advantage or disadvantage for
processing further and selling Decaf Columbian.
a.
Proposal to Process Columbian Coffee Further
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian [(8,000
pounds – 400* pounds evaporation) × $12.50] ..............
Revenue from sale of Columbian coffee
(8,000 pounds × $10.80)...................................................
Differential revenue ..................................................................
Differential cost per batch:
Additional cost of producing Decaf Columbian ................
Differential loss from further processing:
Decaf Columbian per batch ................................................
$95,000
86,400
$
8,600
10,500
$ (1,900)
*5% × 8,000
b.
The differential revenue from processing further to Decaf Columbian is less
than the differential cost of processing further. Thus, Seattle Roast Coffee
Company should sell Columbian coffee and not process further to Decaf
Columbian.
c.
The price of Decaf Columbian would need to increase to $12.75 per pound in
order for the differential analysis to yield neither an advantage or a
disadvantage (indifference). This is determined as follows:
Net Disadvantage of Further Processing
$1,900
=
= $0.25 per lb.
7,600 lbs.
Volume of Decaf Columbian
The price of Decaf Columbian would need to be $0.25 higher, or $12.75, to yield
no net differential income or loss. This is verified by the following differential
analysis:
Differential revenue from further processing per batch:
Revenue from sale of Decaf Columbian [(8,000
pounds – 400 pounds evaporation) × $12.75] ............................ $96,900
Revenue from sale of Columbian coffee
(8,000 pounds × $10.80)...............................................................
Differential revenue .........................................................................
Differential cost per batch:
Additional cost of producing Decaf Columbian ............................
Differential income from further processing:
Decaf Columbian per batch ............................................................
86,400
$10,500
10,500
$ 0
PR25-1A. On March 1, Midway Distribution Company is considering leasing a building
and buying the necessary equipment to operate a public warehouse.Alternatively,the
com- pany could use the funds to invest in $750,000of 7% U.S.Treasury bonds that
mature in 14 years.The bonds could be purchased at face value.The following data have
been assembled: Cost of equipment $750,000 Life of equipment 14 years Estimated
residual value of equipment $76,000 Yearly costs to operate the warehouse, excluding
depreciation of equipment $195,000 Yearly expected revenues—years 1–7 $330,000
Yearly expected revenues—years 8–14 $280,000 Instructions 1. Prepare a report as of
March 1, 2010, presenting a differential analysis of the proposed operation of the
warehouse for the 14 years as compared with present conditions. 2. Based on the results
disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal
is accepted,what is the total estimated income from operations of the warehouse for the
14 years?
1.
Proposal to Operate Warehouse
March 1, 2010
Differential revenue from alternatives:
Revenue from operating warehouse ................................... $4,270,0001
Revenue from investment in bonds ....................................
735,0002
Differential revenue from operating warehouse...........
Differential cost of alternatives:
Costs to operate warehouse ................................................. $2,730,0003
Cost of equipment less residual value ................................
674,000
Differential cost of operating warehouse.......................
Differential income from operating warehouse.....................
1 (7
$3,535,000
3,404,000
$ 131,000
yrs. × $330,000) + (7 yrs. × $280,000)
2 7%
× $750,000 × 14 yrs.
3 $195,000 × 14 yrs.
2.
The proposal should be accepted.
3.
Total estimated revenue from operating
warehouse .............................................................................
Total estimated expenses to operate warehouse:
Costs to operate warehouse, excluding
depreciation ...................................................................... $2,730,000
$4,270,000
Cost of equipment less residual value ................................
Total estimated income from operating
warehouse .............................................................................
674,000
3,404,000
$
866,000*
*The $866,000 income from operations could also be determined by adding the
$131,000 income from operating the warehouse as derived in part (1) to the
$735,000 of investment income forgone by electing to operate the warehouse.
PR25-4B. The management of Caribbean Sugar Company is considering whether to
process fur- ther raw sugar into refined sugar. Refined sugar can be sold for $1.90per
pound, and raw sugar can be sold without further processing for $1.10per pound. Raw
sugar is produced in batches of 27,000pounds by processing 90,000pounds of sugar
cane,which costs $0.25 per pound. Refined sugar will require additional processing costs
of $0.35per pound of raw sugar, and 1.2pounds of raw sugar will produce 1pound of
refined sugar. Instructions 1. Prepare a report as of January 30,2010,presenting a
differential analysis of the fur- ther processing of raw sugar to produce refined sugar. 2.
Briefly report your recommendations.
1.
Proposal to Process Raw Sugar Further
January 30, 2010
Differential revenue from further processing per batch:
Revenue from sale of refined sugar
[(27,000 lbs./1.2 lbs.) × $1.90]..........................................
Revenue from sale of raw sugar
(27,000 lbs. × $1.10) .........................................................
Differential revenue .........................................................
$ 13,050
Differential cost per batch:
Additional cost of processing refined sugar
(27,000 lbs. × $0.35) .........................................................
Differential income from further processing raw
sugar per batch .....................................................................
$ 3,600
2.
$42,750
29,700
Caribbean Sugar Company should decide to further process raw sugar to
produce refined sugar, since profits would be increased by $3,600 per batch.
9,450