The management of Jamaican Sugar Company is considering whether to process furth

Question

The management of Jamaican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $2.25 per pound, and raw sugar can be sold without further processing for $1.26 per pound. Raw sugar is produced in batches of 27,600 pounds by processing 69,000 pounds of sugar cane, which costs $0.32 per pound of cane. Refined sugar will require additional processing costs of $0.47 per pound of raw sugar, and 1.2 pounds of raw sugar will produce 1 pound of refined sugar. Required: Prepare a differential analysis as of January 30, 2014, to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2). If required, do not round interim calculations.

Explanation / Answer

Differential Analysis:

1. a. Raw Sugar Revenue = Batch * Sale price per pound $1.26 = 27,600*1.26 = 34,776

b. Raw Sugar Costs = $69,000*0.32 = 22,080

c. Raw Sugar Income = 34,776 - 22,080 = 12,696

2. Refined Sugar Batch = 1.2 pounds of raw sugar will produce 1 pound of refined sugar. Hence 27,600/1.2 = 23,000

a. Refined Sugar Revenue = 23,000 * $2.25 = 51,750

b. Refined Sugar Costs = Cost incurred to produce raw sugar i.e., 69,000*0.32 = 22,080

c. Additional Cost = $0.47 per pound of raw sugar = 27,600*0.47 = 12,972.

d. Income of Refined Sugar = 51,750 - 22,080 - 12,972 = 16,698

Differentia Effect on Income = If the raw sugar is sold it gives $12,696. If the raw sugar is refined and sold it gives $16,698.

Items Raw Sugar Refined Sugar Revenues, per Batch $34,776 $51,750 Costs, per Batch $22,080 $22,080 Additional Costs 0 $12,972 Income (Loss), per Batch $12,696 $16,698

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