Barstow Corporation buys three chemical that are processed to produce two popular ingredients for liquid cough syrups. The three chemicals are in liquid form. The purchased chemicals are blended for two or three hours and then heated for fifteen mins. The results of the process are two separate ingredients, Suppressant AB2 and Suppressant AB3. The suppressant are sold to companies that process them into their final form. The selling prices are $10 per gallon for AB2 and $25 per gallon for AB3. The costs to produce 1,000 gallons of each chemical are as following:
checmicals $11,000
Direct Labor $9,000
Overhead $7,000
The suppressant are bottled in 4-gallon plastic containers and shipped. The cost of each container is $1.50. Shipping cost $.20 per container.
Barstow Co. could process suppressant ab2 further by mixing it with inert powders and flavoring to form cough tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route is taken, the revenue received per case of tablets would be $6.00, with five cases produced by every gallon of suppressant ab2. The costs of processing into tablets total $5.00 per gallon of ab2. packaging cost $2.00 per case. Shipping cost $.40 per case.
Required
A. should Barstow sell suppressant ab2 at split-off or should ab2 be processed and sold as tablets?
B. If Barstow normally sells 360,000 gallon of ab2 per year, what will be the difference in profits if ab2 is processed further?