Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 1

Sell or process further? ADP Mining Company mines an iron ore called Alpha. During the month of August, 175,000 tons of Alpha were mined and processed at a cost of $525,000. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes Delta and 40% becomes Pi. Each product can be sold as is or processed into the refined products Super Delta and Precision Pi. Selling prices for these products are as follows:

Processing costs to refine Delta into Super Delta are $840,000; processing costs to refine Pi into Precision Pi are $560,000.
Required:
a. Should Delta and Pi be sold as is or refined into Super Delta and Precision Pi?
b. Identify any costs in the problem that are not relevant to this decision.
c. What is the maximum profit that ADP Mining Company can expect to earn from the production of the 175,000 tons of Alpha?