Sell or Process Further Rise N’ Shine Coffee Company produces Columbian coffee i

Question

Sell or Process Further

Rise N’ Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $6 per pound. Columbian coffee can be sold without further processing for $8.4 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $10 per pound. The processing into Decaf Columbian requires additional processing costs of $8,950 per batch. The additional processing will also cause a 5% loss of product due to evaporation.

a. Prepare a differential analysis dated October 6 on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).

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a. For both products, subtract the costs from the revenue per batch. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 2 from alternative 1.

Learning Objective 1.

b. Should Rise N’ Shine sell Columbian coffee or process further and sell Decaf Columbian?
Sell Columbian

c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian. Round your answer to two decimal places.
$ per pound

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Differential Analysis Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2) October 6 Sell Regular
Columbian
(Alternative 1) Process Further
into Decaf Columbian
(Alternative 2) Differential
Effect on Income
(Alternative 2) Revenues $ $ $ Costs Income (Loss) $ $ $

Explanation / Answer

Answers

Differential Analysis

Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)

Oct-06

Sell Regular

Process Further

Differential

Columbian

into Decaf Columbian

Effect on Income

(Alternative 1)

(Alternative 2)

(Alternative 2)

Revenues

$               50,400.00

$                     57,000.00

$            6,600.00

Costs

$              (36,000.00)

$                    (44,950.00)

$           (8,950.00)

Income (Loss)

$               14,400.00

$                     12,050.00

$           (2,350.00)

Working

Differential Analysis

Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)

38991

Sell Regular

Process Further

Differential

Columbian

into Decaf Columbian

Effect on Income

(Alternative 1)

(Alternative 2)

(Alternative 2)

Revenues

=6000*8.4

=6000*95%*10

Costs

=-6000*6

=-36000-8950

Income (Loss)

Income (Loss)

Income (Loss)

Income (Loss)

Rise N Shine should SELL REGULAR COLUMBIAN. This is because if it further processes it to Decaf Columbian, the Net Income will fall by $ 2350.

Let The decaf price be ‘$x’, then, at indifference point, Net Income under both would be equal.

(50400 – 36000) = (5700x – 44950)
14400 = 5700x – 44950
14400 + 44950 = 5700x
59350 = 5700x
x = 59350 / 5700
x = $ 10.41

Answer: $ 10.41 per pound

Differential Analysis

Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2)

Oct-06

Sell Regular

Process Further

Differential

Columbian

into Decaf Columbian

Effect on Income

(Alternative 1)

(Alternative 2)

(Alternative 2)

Revenues

$               50,400.00

$                     57,000.00

$            6,600.00

Costs

$              (36,000.00)

$                    (44,950.00)

$           (8,950.00)

Income (Loss)

$               14,400.00

$                     12,050.00

$           (2,350.00)

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