Avalon Chemicals Company processes a number of chemical compounds for use in veterinary medicine. One compound is decomposed into two chemicals: avacol and selgene.

The cost of processing one batch of compound is $74,000, and the result is 4,000 gallons of avacol and 6,000 gallons of selgene. Avalon Chemicals can sell the avacol at split-off for $13 per gallon and the selgene for $4.50 per gallon. Alternatively, the avacol can be processed further at a cost of $9 per gallon (of avacol) into flourcine. It takes 2 gallons of avacol for every gallon of flourcine. A gallon of flourcine sells for $46.

Required:

1. List the alternatives being considered.

2. List the relevant benefits and costs for each alternative.

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

4. What ifthe production of avacol into flourcine required additional purchasing and quality inspection activity? Every 500 gallons of avacol that undergo further processing require 20 more purchase orders at $10 each and 15 more quality inspection hours at $25 each. Which alternative would be better and by how much?

LO1