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 $78,500, and the result is 6,000 gallons of flexalene and 8,300 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $9.00 per gallon and the soreaphine for $6.70 per gallon. Alternatively, the flexalene can be processed further at a cost of $8.20 per gallon (of flexalene) into lactine. It takes 2 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $60.

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.

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2. What if the production of flexalene into lactine required additional purchasing and quality inspection activity? Every 560 gallons of flexalene that undergo further processing require 20 more purchase orders at $9 each and 14 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.

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by $fill in the blank 4