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.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
1. Complete the following comparison alternatives.
Per 600 pounds Process Further Sell Difference
Revenues
Bags
Shipping
Grinding
Bottles
Totals
2. Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets and why.
3. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits, in dollars, if depryl is processed further?
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