Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs Vihaan Chemicals Company processes a number of chemical compounds used in disinfecting health club fitness equipment. One compound is decomposed into two chemicals: flexalene and soreaphine. The cost of processing one batch of compound is $74,000, and the result is 5,900 gallons of flexalene and 7,800 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $11.00 per gallon and the soreaphine for $6.75 per gallon. Alternatively, the flexalene can be processed further at a cost of $7.40 per gallon (of flexalene) into lactine. It takes 4 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $65. Required: 1. Which alternative is more cost effective and by how much? NOTE: Do NOT round interim calculations and, if required, round your answer to the nearest dollar. by $fill in the blank 2 2. What if the production of flexalene into lactine required additional purchasing and quality inspection activity? Every 540 gallons of flexalene that undergo further processing require 17 more purchase orders at $8 each and 17 more quality inspection hours at $23 each. Which alternative would be better and by how much? NOTE: Round interim calculations and your final answer to the nearest cent. by $fill in the blank 4

FINANCIAL ACCOUNTING

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ISBN:9781259964947

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Chapter1: Financial Statements And Business Decisions

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Sell at Split-Off or Process Further Decision, Alternatives, Relevant Costs

Vihaan Chemicals Company processes a number of chemical compounds used in disinfecting health club fitness equipment. One compound is decomposed into two chemicals: flexalene and soreaphine. The cost of processing one batch of compound is $74,000, and the result is 5,900 gallons of flexalene and 7,800 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $11.00 per gallon and the soreaphine for $6.75 per gallon. Alternatively, the flexalene can be processed further at a cost of $7.40 per gallon (of flexalene) into lactine. It takes 4 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $65.

Required:

1. Which alternative is more cost effective and by how much?
NOTE: Do NOT round interim calculations and, if required, round your answer to the nearest dollar.

by $fill in the blank 2

2. What if the production of flexalene into lactine required additional purchasing and quality inspection activity? Every 540 gallons of flexalene that undergo further processing require 17 more purchase orders at $8 each and 17 more quality inspection hours at $23 each. Which alternative would be better and by how much?
NOTE: Round interim calculations and your final answer to the nearest cent.

by $fill in the blank 4

### Sell at Split-Off or Process Further Decision, Alternatives, and Relevant Costs

Vihaan Chemicals Company processes a number of chemical compounds used in disinfecting health club fitness equipment. One compound is decomposed into two chemicals: flexalene and soreaphine. The cost of processing one batch of compound is $74,000, and the result is 5,900 gallons of flexalene and 7,800 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $11.00 per gallon and the soreaphine for $6.75 per gallon. Alternatively, the flexalene can be processed further at a cost of $7.40 per gallon (of flexalene) into lactine. It takes 4 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $65.

**Required:**

1. **Which alternative is more cost effective and by how much?**

**Note:** Do NOT round interim calculations and, if required, round your answer to the nearest dollar.

- **Process it further** is more cost effective by **$12,685**.

2. **What if the production of flexalene into lactine required additional purchasing and quality inspection activity?** Every 540 gallons of flexalene that undergo further processing require 17 more purchase orders at $8 each and 17 more quality inspection hours at $23 each. Which alternative would be better and by how much?

**Note:** Round interim calculations and your final answer to the nearest cent.

- **Sell at split-off** is more cost effective by **$6,927.03**.

**Feedback:**

1. **Check My Work**

- Set up the analysis with the relevant costs and revenues organized under a column heading for each alternative. What is the difference between the two alternatives?

2. Set up the analysis with the relevant costs and revenues organized under a column heading for each alternative.

**See Example 17.4.**

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