E16-4 Sell or process further? [LO 2, 3] Mizzou Mining Company mines an iron ore

Question

E16-4 Sell or process further? [LO 2, 3]

Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are:

Processing costs to refine Delta into Super Delta are $2,400,000: processing costs to refine Pi into Precision Pi are $1,600,000.

What would be the incremental profit or loss per unit if Delta is refined into Super Delta? (Input the amount as positive value. Omit the "$" sign in your response.)

What would be the incremental profit or loss per unit if Pi is refined into Precision Pi? (Omit the "$" sign in your response.)

Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are:

Explanation / Answer

tons of delta = 400,000*.6 = 240,000 tons of pi = 400,000*.4 = 160,000 Incremental profit is the difference between incremental revenue and incremental cost. For delta: incremental revenue is 15-7 = $8 per ton incremental cost is $2,400,000/240,000 tons = $10 per ton 8 - 10 = -2 This would be an incremental loss of $2 per ton for delta For pi: incremental revenue is 24-12 = $12 per ton incremental cost is $1,600,000/160,000 = $10 per ton 12 - 10 = 2 This would be an incremental profit of $2 per ton for pi

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