Question

Differential Analysis for Further Processing

The management of Dominican Sugar Company is considering whether to process further raw sugar into re-fined sugar. Re-fined sugar can be sold for $2.20 per pound, and raw sugar can be sold without further processing for $1.40 per pound. Raw sugar is produced in batches of 42,000 pounds by processing 100,000 pounds of sugar cane, which costs $0.35 per pound of cane. Re-fined sugar will require additional processing costs of $0.50 per pound of raw sugar, and 1.25 pounds of raw sugar will produce 1 pound of re-fined sugar.
1. Prepare a differential analysis as of March 24 to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2)
2. Briefly report your recommendations.

Answer 1

Dominican Sugar Company

1. Differential Analysis as of March 24:

Raw Sugar Refined Sugar

Alternative 1 Alternative 2 Difference

Sales volume 42,000 33,600

Selling price per pound $1.40 $2.20

Sales revenue $58,800 $73,920 $15,120

Materials requirement 100,000 42,000

Output from process 42,000 33,600

Unit cost $0.35

Cost of materials $35,000 $35,000

Cost of further refining $21,000

Total costs $35,000 $56,000 ($21,000)

Net income $23,800 $17,920 ($5,880)

2. Based on cost implications, Dominican Sugar should not refine the raw sugar further. Further refining will cause the company $5,880 in lost income. This means that it costs more to refine the raw sugar.

Step-by-step explanation:

a) Data and Calculations:

Raw Sugar Refined Sugar

Alternative 1 Alternative 2

Sales volume 42,000 33,600 (42,000/1.25)

Selling price per pound $1.40 $2.20

Sales revenue $58,800 $73,920

Materials requirement 100,000 42,000

Output from process 42,000 33,600 (42,000/1.25)

Unit cost $0.35

Cost of materials $35,000 $35,000

Cost of further refining $21,000 (42,000 * $0.50)

Total costs $35,000 $56,000

Net income $23,800 $17,920