Problem 11 - Accounting

Question

Seattle Roast Coffee Company produces Columbian coffee in batches of 8,000 pounds. The standard quantity of materials required in the process is 8,000 pounds, which cost \(\$ 5.00\) per pound. Columbian coffee can be sold without further processing for \(\$ 10.80\) per pound. Columbian coffee can also be processed further to yield Decaf Columbian, which can be sold for \(\$ 12.50\) per pound. The processing into Decaf Columbian requires additional processing costs of \(\$ 10,500\) per 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.

Step-by-Step Solution

Answer

Seattle Roast should sell Columbian coffee as is, without further processing. The breakeven price for Decaf Columbian is about $12.76 per pound.

Step 1: Calculate Revenue Without Further Processing

For Columbian coffee, the revenue is obtained by selling it directly. The selling price per pound is \( \\(10.80 \). Since the batch contains 8,000 pounds, the total revenue without further processing is calculated as follows:\[\text{Revenue without processing} = 8,000 \text{ pounds} \times \\)10.80/\text{pound} = \$86,400.\]

Step 2: Calculate Revenue With Further Processing

For Decaf Columbian, there is a 5% loss of product due to evaporation. Thus, the effective amount of coffee after processing is:\[8,000 \text{ pounds} \times (1 - 0.05) = 7,600 \text{ pounds}.\]The selling price for Decaf Columbian is \( \\(12.50 \) per pound. Therefore, the total revenue with further processing is:\[\text{Revenue with processing} = 7,600 \text{ pounds} \times \\)12.50/\text{pound} = \$95,000.\]

Step 3: Calculate Additional Processing Cost

The additional processing cost for converting into Decaf Columbian is given as \( \$10,500 \) per batch.

Step 4: Conduct Differential Analysis

Now, we calculate the differential effect by comparing the revenues and subtracting the processing cost.The additional revenue obtained by processing further is:\[\text{Additional Revenue} = \\(95,000 - \\)86,400 = \\(8,600.\]Considering the processing costs:\[\text{Net Advantage/Disadvantage} = \\)8,600 - \\(10,500 = -\\)1,900.\]Since this result is negative, further processing results in a disadvantage of \( \$1,900 \).

Step 5: Determine Breakeven Price for Decaf Columbian

To find the breakeven selling price for Decaf Columbian, we set the net effect to zero.Let \( x \) be the breakeven price per pound of Decaf Columbian. The equation for breakeven is given by:\[ 7,600 \times x - 8,000 \times 10.80 - 10,500 = 0. \]Solving for \( x \):\[7,600x = 86,400 + 10,500.\]\[7,600x = 96,900.\]\[x = \frac{96,900}{7,600} \approx 12.76.\]Therefore, the breakeven price is \( \$12.76 \) per pound.

Key Concepts

Cost Accounting

Cost accounting is all about figuring out how much money a company spends to produce its goods or services. It helps businesses by providing insights into their expenses, which aids in managing costs efficiently. In this scenario, Seattle Roast Coffee Company needs to understand the costs related to producing both regular Columbian coffee and Decaf Columbian coffee after further processing.

Cost accounting involves tracking several factors:

• Material costs: For this exercise, the cost of Columbian coffee beans is \( \\(5.00 \) per pound.
• Additional costs: Creating Decaf Columbian involves an extra processing cost of \( \\)10,500 \) per batch.

By understanding and managing these costs, Seattle Roast can determine the profitability of their products and make informed decisions.

Decision Making

Decision making in business means selecting the best choice from available options to achieve the desired outcome. Here, Seattle Roast must decide whether to sell their Columbian coffee directly or proceed with additional processing to produce Decaf Columbian coffee.

The decision-making process revolves around the differential analysis which considers:

• Revenue without processing: This is the income from selling Columbian coffee directly at \( \\(10.80 \) per pound, totaling to \( \\)86,400 \).
• Revenue with processing: After losing 5% product due to evaporation, Decaf Columbian yields \( \\(95,000 \) at \( \\)12.50 \) per pound.
• Extra costs: The \( \\(10,500 \) additional cost for processing.
• Net effect: The differential analysis shows a \( \\)1,900 \) disadvantage due to the extra cost exceeding additional revenue, suggesting it might be more profitable to sell directly.

Using differential analysis helps simplify complex decisions by highlighting financial outcomes.

Financial Analysis

Financial analysis is about examining financial data to understand the business's financial status and future projections. For Seattle Roast Coffee, financial analysis plays a crucial role in understanding the profitability of their product lines through a breakeven analysis.

Key components include:

• Revenue calculations: Determines how much income each option would generate.
• Breakeven point: Understanding the breakeven price for Decaf Columbian, which is \( \$12.76 \) per pound, means finding the price where the costs of processing further and revenues are equal.

By analyzing these financial aspects, Seattle Roast can better plan their pricing strategies, understand economic impacts, and make intelligent decisions on what is financially more viable.