Question

The management of dominican sugar company is considering whether to process further raw sugar into refined sugar. refined sugar can be sold for $2.23 per pound, and raw sugar can be sold without further processing for $1.43 per pound. raw sugar is produced in batches of 42,500 pounds by processing 100,000 pounds of sugar cane, which costs $0.36 per pound of cane. refined sugar will require additional processing costs of $0.49 per pound of raw sugar, and 1.25 pounds of raw sugar will produce 1 pound of refined sugar.

Answer 1

We shall Ignore cost of sugar cane at $0.36 per pound, as its going to be incurred for both processes.

Lets find the cash flow from not processing further:

42500 pounds Sugar @ $1.43 per Pound $60,775

Lets find the cash flow from Processing Further:

If 42500 pounds of raw sugar are processed further, we get 34000 pounds of refined sugar(42500/1.25)

34000 pounds of refined sugar@ $2.23 per pound $75280

Additional Processing charges for 42500 pounds@$0.49 ($20825)

Total Cash Flow $54995

As can be observed, the organisation earns more when they sell raw sugar, Thus sugar should not be processed further.