Chemco Corporation buys three chemicals 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 to three hours and then heated for 15 minutes. The results of the process are two separate ingredients, Suppressant AB2 and Suppressant AB3. For every 2,200 gallons of chemicals used, 1,000 gallons of each suppressant are produced. The suppressants are sold to companies that process them into their final form. The selling prices are $25 per gallon for AB2 and $12 per gallon for AB3. The costs to produce 1,000 gallons of each chemical are as follows:

Chemicals .....$11,000

Direct labor .......9,000

Catalyst .........3,600

Overhead ......7,000

The suppressants are bottled in five-gallon plastic containers and shipped. The cost of each container is $1.65. The costs of shipping are $0.20 per container. Chemco Corporation 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 $8.50, with 10 cases produced by every gallon of Suppressant AB2. The costs of processing into tablets total $5.00 per gallon of AB2. Packaging costs $4.86 per case. Shipping costs $0.40 per case.

Required:

1. Should Chemco sell Suppressant AB2 at split-off, or should AB2 be processed and sold as tablets?

2. If Chemco normally sells 360,000 gallons of AB2 per year, what will be the difference in profits if AB2 is processed further?