Rise N’ Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds

Rise N’ Shine Coffee Company produces Columbian coffee in batches of 6,000 pounds. The standard quantity of materials required in the process is 6,000 pounds, which cost $5.50 per pound. Columbian coffee can be sold without further processing for $9.22 per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for $11.88 per pound. The processing into Decaf Columbian requires additional processing costs of $10,230 per batch. The additional processing will also cause a 5% loss of product due to evaporation.


a. Prepare a differential analysis dated October 6, 2014, on whether to sell regular Columbian (Alternative 1) or process further into Decaf Columbian (Alternative 2).

b.  Should Rise N’ Shine sell Columbian coffee or process further and sell Decaf Columbian?

c. Determine the price of Decaf Columbian that would cause neither an advantage nor a disadvantage for processing further and selling Decaf Columbian.


Answer:


a. Differential Analysis 
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2) 
October 6, 2014 


Sell 
Regular 
Columbian 
(Alternative 1) 
Process 
Further into 
Decaf 
Columbian 
(Alternative 2) 
Revenues $55,320 1
 $
67,716 2
 C
osts –33,000 3
 –
43,230 4
 I
ncome (Loss) $22,320 $24,486 $  2,166 
    
$9.22 × 6,000 lbs. 
$11.88 × (6,000 lbs. × 95%) 
$5.50 × 6,000 lbs. 
$33,000 + $10,230 
b. The differential revenue from processing further to Decaf Columbian is more 
than the differential cost of processing further by $2,166. Thus, Rise N’ Shine 
Coffee Company should sell and process further to Decaf Columbian. 
 c. The price of Decaf Columbian would need to decrease to $11.50 per pound 
in order for the differential analysis to yield neither an advantage nor a 
disadvantage (indifference). This is determined as follows: 
Net Advantage of Further Processing 
Volume of Decaf Columbian 
$2,166 =  $0.38 per lb. 
= 
5,700 lbs. 
The price of Decaf Columbian would need to be $0.38 lower, or $11.50, to 
yield no net differential income or loss. This is verified by the following 
differential analysis: 
Differential Analysis 
Sell Regular Columbian (Alt. 1) or Process Further into Decaf Columbian (Alt. 2) 
October 6, 2014 
 Sell Regular 
Columbian 
(Alternative 1) 
Process 
Further into 
Decaf Columbian 
(Alternative 2) 
Differential 
Effect 
on Income 
(Alternative 2) 
Revenues $55,320 $65,550* $10,230 
Costs –33,000 –43,230 –10,230 
Income (Loss) $22,320 $22,320 $ 0 
    
* $11.50 × (6,000 lbs. × 95%)