The management of Dominican Sugar Company is considering whether to process further raw sugar into refined sugar. Refined sugar can be sold for $2.20 per pound, and raw sugar can be sold without further processing for $1.40 per pound. Raw sugar is produced in batches of 42,000 pounds by processing 100,000 pounds of sugar cane, which costs $0.35 per pound of cane. Re-fined sugar will require additional processing costs of $0.50 per pound of raw sugar, and 1.25 pounds of raw sugar will produce 1 pound of refined sugar.

Instructions

1.Prepare a differential analysis as of March 24 to determine whether to sell raw sugar (Alternative 1) or process further into refined sugar (Alternative 2).

2. Briefly report your recommendations.

1.Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential profit (loss).

2. A company could sell a building for $250,000 or lease it for $2,500 per month. What would need to be considered in determining if the lease option would be preferred?

3. A chemical company has a commodity-grade and premium-grade product. Why might the company elect to process the commodity-grade product further to the premium-grade product?

4. A company accepts incremental business at a special price that exceeds the variable cost. What other issues must the company consider in deciding whether to accept the business?

What is the appropriate measure of a product's value when a firm is operating under production bottlenecks?