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 $125,000, and the result is 5,000 gallons of flexalene and 10,000 gallons of soreaphine. Vihaan Chemicals can sell the flexalene at split-off for $7 per gallon and the soreaphine for $9 per gallon. Alternatively, the flexalene can be processed further at a cost of $10 per gallon (of flexalene) into lactine. It takes 5 gallons of flexalene for every gallon of lactine. A gallon of lactine sells for $95.

Required:

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

2. What if the production of flexalene into lactine required additional purchasing and quality inspection activity? Every 100 gallons of flexalene that undergo further processing require 25 more purchase orders at $5 each and 10 more quality inspection hours at $17 each. Which alternative would be better and by how much?