EX25-11



EX25-11. Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000pounds. The standard quantity of materials required in the process is 8,000pounds,which cost $5.00per pound.Columbian coffee can be sold without further processing for $10.80per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $12.50per pound.The processing into Decaf Columbian requires additional processing costs of $10,500per batch. The additional processing will also cause a 5% loss of product due to evaporation. a. Prepare a differential analysis report for the decision to sell or process further. b. Should Seattle Roast sell Columbian coffee or process further and sell Decaf Columbian? c. Determine the price of Decaf Columbian that would cause neither an advantage or disadvantage for processing further and selling Decaf Columbian.

a.

Proposal to Process Columbian Coffee Further

Differential revenue from further processing per batch:

Revenue from sale of Decaf Columbian [(8,000

pounds – 400* pounds evaporation) × $12.50] $95,000

Revenue from sale of Columbian coffee

(8,000 pounds × $10.80) 86,400

Differential revenue $ 8,600

Differential cost per batch:

Additional cost of producing Decaf Columbian 10,500

Differential loss from further processing:

Decaf Columbian per batch $ (1,900)

*5% × 8,000

b. The differential revenue from processing further to Decaf Columbian is less than the differential cost of processing further. Thus, Seattle Roast Coffee Company should sell Columbian coffee and not process further to Decaf Columbian.

c. The price of Decaf Columbian would need to increase to $12.75 per pound in order for the differential analysis to yield neither an advantage or a disadvantage (indifference). This is determined as follows:

[pic] = [pic] = $0.25 per lb.

The price of Decaf Columbian would need to be $0.25 higher, or $12.75, to yield no net differential income or loss. This is verified by the following differential analysis:

Differential revenue from further processing per batch:

Revenue from sale of Decaf Columbian [(8,000

pounds – 400 pounds evaporation) × $12.75] $96,900

Revenue from sale of Columbian coffee

(8,000 pounds × $10.80) 86,400

Differential revenue $10,500

Differential cost per batch:

Additional cost of producing Decaf Columbian 10,500

Differential income from further processing:

Decaf Columbian per batch $ 0

PR25-1A. On March 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse.Alternatively,the com- pany could use the funds to invest in $750,000of 7% U.S.Treasury bonds that mature in 14 years.The bonds could be purchased at face value.The following data have been assembled: Cost of equipment $750,000 Life of equipment 14 years Estimated residual value of equipment $76,000 Yearly costs to operate the warehouse, excluding depreciation of equipment $195,000 Yearly expected revenues—years 1–7 $330,000 Yearly expected revenues—years 8–14 $280,000 Instructions 1. Prepare a report as of March 1, 2010, presenting a differential analysis of the proposed operation of the warehouse for the 14 years as compared with present conditions. 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted,what is the total estimated income from operations of the warehouse for the 14 years?

1.

Proposal to Operate Warehouse

March 1, 2010

Differential revenue from alternatives:

Revenue from operating warehouse $4,270,0001

Revenue from investment in bonds 735,0002

Differential revenue from operating warehouse $3,535,000

Differential cost of alternatives:

Costs to operate warehouse $2,730,0003

Cost of equipment less residual value 674,000

Differential cost of operating warehouse 3,404,000

Differential income from operating warehouse $ 131,000

1 (7 yrs. × $330,000) + (7 yrs. × $280,000)

2 7% × $750,000 × 14 yrs.

3 $195,000 × 14 yrs.

2. The proposal should be accepted.

3. Total estimated revenue from operating

warehouse $4,270,000

Total estimated expenses to operate warehouse:

Costs to operate warehouse, excluding

depreciation $2,730,000

Cost of equipment less residual value 674,000 3,404,000

Total estimated income from operating

warehouse $ 866,000*

*The $866,000 income from operations could also be determined by adding the $131,000 income from operating the warehouse as derived in part (1) to the $735,000 of investment income forgone by electing to operate the warehouse.

PR25-4B. The management of Caribbean Sugar Company is considering whether to process fur- ther raw sugar into refined sugar. Refined sugar can be sold for $1.90per pound, and raw sugar can be sold without further processing for $1.10per pound. Raw sugar is produced in batches of 27,000pounds by processing 90,000pounds of sugar cane,which costs $0.25 per pound. Refined sugar will require additional processing costs of $0.35per pound of raw sugar, and 1.2pounds of raw sugar will produce 1pound of refined sugar. Instructions 1. Prepare a report as of January 30,2010,presenting a differential analysis of the fur- ther processing of raw sugar to produce refined sugar. 2. Briefly report your recommendations.

1.

Proposal to Process Raw Sugar Further

January 30, 2010

Differential revenue from further processing per batch:

Revenue from sale of refined sugar

[(27,000 lbs./1.2 lbs.) × $1.90] $42,750

Revenue from sale of raw sugar

(27,000 lbs. × $1.10) 29,700

Differential revenue $ 13,050

Differential cost per batch:

Additional cost of processing refined sugar

(27,000 lbs. × $0.35) 9,450

Differential income from further processing raw

sugar per batch $ 3,600

2. Caribbean Sugar Company should decide to further process raw sugar to produce refined sugar, since profits would be increased by $3,600 per batch.

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