Sell or Process Further Zanda Drug Corporation buys three chemicals that are pro
ID: 2566113 • Letter: S
Question
Sell or Process Further Zanda Drug Corporation buys three chemicals that are processed to produce two types of analgesics used as ingredients for popular over-the-counter drugs. The purchased chemicals are blended for 2 to 3 hours and then heated for 15 minutes. The results of the process are two separate analgesics, depryl and pencol, which are sent to a drying room until their moisture content is reduced to 6 to 8%. For every 1,300 pounds of chemicals used, 600 pounds of depryl and 600 pounds of pencol are produced. After drying, depryl and pencol are sold to companies that process them into their final form. The selling prices are $12 per pound for depryl and $30 per pound for pencol. The costs to produce 600 pounds of each analgesic are as follows: Chemicals $8,500 Direct labor 6,735 Overhead 9,900 The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is $1.30. Shipping costs $0.10 per pound. Zanda could process depryl further by grinding it into a fine powder and then molding the powder into tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route were taken, the revenue received per bottle of tablets would be $4.00, with 10 bottles produced by every pound of depryl. The costs of grinding and tableting total $2.50 per pound of depryl. Bottles cost $0.40 each. Bottles are shipped in boxes that hold 25 bottles at a shipping cost of $1.60 per box. Required: 1. Conceptual Connection: Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets? Depryl should be processed and sold as tablets. 2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further? Do not round intermediate calculations.
Explanation / Answer
To know whether process or not first, the total revenue and total cost should be calculated and then the difference should be identified.
600 lbs
Process further
Sell
Difference
Revenue ( A)
$24,000
$7,200
$16,800
Bags (B)
0
(39)
39
Shipping ©
(384)
(60)
(324)
Grinding (D)
(1500)
0
(1500)
Bottles (E)
(2,400)
0
(2400)
total
$19,716
$7,101
$12,615
(A) Calculation of Revenue before and after the process:
i. Total no. of pounds of Depryl = 600
By each pound = 10 bottles of depryl produced.
The revenue per bottle of tablets = $4.00
Revenue = 600 x 10 x $4 =$24,000
ii. The selling price per pound for depryl = $ 12 X 600 =$ 7,200
iii. The difference amount = $24,000 - $ 7,200 = $16,800
(B) The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is $1.30. Cost of each bag = $1.30
20 pounds – 1 bag
600 pounds - ?
600/20 X 1.30 = $39
( C ) Shipping costs $0.10 per pound.
iBottles shipped in boxed that hold 25 bottles.
(0.10 X 600) / 25 X 1.60 per box = $384
ii.600 X 0.10 = 60
iii. Difference = $384 - $ 60 = $ 324
( D ) Grinding: The costs of grinding and tableting total $2.50 per pound of depryl
$2.50 X 600 = $ 1500
( E ) Bottles = Bottles cost $0.40 each
10 X 600 X 0.40 = $2,400
the positive difference amount is $12,615, so, Zanda should process depryl further
2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further? Do not round intermediate calculations.
For 600 pounds the difference amount is $12,615.
For 265,000 Pounds = ($12,615 / 600) =$ 21.025
$21.025X 265,000 = $5,571,625
If depryl is processed further the difference in profits will be - $5,571,625
600 lbs
Process further
Sell
Difference
Revenue ( A)
$24,000
$7,200
$16,800
Bags (B)
0
(39)
39
Shipping ©
(384)
(60)
(324)
Grinding (D)
(1500)
0
(1500)
Bottles (E)
(2,400)
0
(2400)
total
$19,716
$7,101
$12,615
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