15.00 points Exercise 16-10 Sell or process further? LO 2, 3 ADP Mining Company

Question

15.00 points Exercise 16-10 Sell or process further? LO 2, 3 ADP Mining Company mines an iron ore called Alpha. During the month of August, 414,000 tons of Alpha were mined and processed at a cost of $749,500. 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 as follows: Delta $13 /ton Super Delta $17 Iton Pi 16 /ton Selling price $24 /ton Processing costs to refine Delta into Super Delta are $2,235,600; processing costs to refine Pi into Precision Pi are $993,600 Required: a-1. What would be the incremental profit or loss per unit if Delta is refined into Super Delta? (Loss amounts should be indicated with a minus sign.) Incremental Profit (Loss) a-2. What would be the incremental profit or loss per unit if Pi is refined into Precision Pi? Increm ental Profit (Loss)

Explanation / Answer

Ans a-1: ADP Mining company will earn incremental profit of `$6.2 per ton, if it further refines Delta into Super Delta.

Workings: When Alpha is mined, 60% of the Alpha output results in Delta, So assuming that all the units produced during the period i.e 414000 tons are mined to process into Delta.

So, we get about 248400 tons of Delta (60% of 414000), Cost of mining 414000 units of Alpha is $749500, so to calculte the total cost of mining only Delta (60% of $749500)=$4,49,700.

If the ADP Mining Company further plans to process Delta into Super Delta, it would have to incur an additional cost of $ 2,235,600.

So the total cost of process into Delta from Alpha and further from Delta to Super Delta = $4,49,700+$2,235,600=$26,85,300

The selling price of Super Delta = $17/ton

The total sales revenue of selling 248400 tons of Super Delta would be = 248400*17=$42,22,800

Incremental profit=$42,22,800-$26,85,300 =$15,37,500 or $15,37,500/248400 tons =6.2 per ton.

Ans a-2: ADP Mining company will earn incremental profit of `$16 per ton, if it further refines Pi into Precision Pi.

Workings: When Alpha is mined, 40% of the Alpha output results in Pi, So assuming that all the units produced during the period i.e 414000 tons are mined to process into Pi.

So, we get about 165600 tons of Pi (40% of 414000), Cost of mining 414000 units of Alpha is $749500, so to calculate the total cost of mining only Pi (40% of $749500)=$2,99,800.

If the ADP Mining Company further plans to process Pi into Precision Pi, it would have to incur an additional cost of $ 9,93,600.

So the total cost of process into Pi from Alpha and further from Pi to Precision Pi = $2,99,800+$9,93,600=$12,93,400

The selling price of Super Delta = $24/ton

The total sales revenue of selling 165600 tons of Precision Pi would be = 165600*24=$39,74,400

Incremental profit=$39,74,400-$12,93,400 =$26,81,000 or $26,81,000/165600tons =16 per ton.

Ans a-3 and a-4: According to me, ADP Mining company should sell the Delta and Pi as it is without processing, as the further processing of Delta into Super Delta andPi nto Precison Pi results in additional ficed cost of about $32,29,200 ($2,235,600+$9,93,600), resulting a decline in incremental profit earned on each unit.

Ans c: ADP Mining company is expected to earn max profit of $51,29,300 if it decides to sell Delta and Pi as it is.

Workings:

When Alpha is mined, 60% of the Alpha output results in Delta, So assuming that all the units produced during the period i.e 414000 tons are mined to process into Delta.

So, we get about 248400 tons of Delta (60% of 414000), Cost of mining 414000 units of Alpha is $749500, so to calculte the total cost of mining only Delta (60% of $749500)=$4,49,700.

Selling price of Delta is = $13 per ton,

So, the Sales revenue of selling 248400 units of Delta will be $32,29,200

Incremental profit of selling Delta= $32,29,200-$4,49,700=$27,79,500

When Alpha is mined, 40% of the Alpha output results in Pi, So assuming that all the units produced during the period i.e 414000 tons are mined to process into Pi.

So, we get about 165600 tons of Pi (40% of 414000), Cost of mining 414000 units of Alpha is $749500, so to calculate the total cost of mining only Pi (40% of $749500)=$2,99,800.

Selling price of Pi is = $16 per ton,

So, the Sales revenue of selling 16560 units of Pi will be $26,49,600

Incremental profit of selling Pi= $26,49,600-$2,99,800=$23,49,800

Total profit earned by ADP Mining Co= $51,29,300

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