Zanda Drug Corporation buys three chemicals that are processed to
Zanda Drug Corporation buys three chemicals that are processed to produce two types of analgesics used as ingredients for popular over-the-counter drugs. The purchased chemicals are blended for two to three hours and then heated for 15 minutes. The results of the process are two separate analgesics, depryl and pencol, which are sent to a drying room until their moisture content is reduced to 6 to 8 percent. For every 1,300 pounds of chemicals used, 600 pounds of depryl and 600 pounds of pencol are produced. After drying, depryl and pencol are sold to companies that process them into their final form. The selling prices are $ 12 per pound for depryl and $ 30 per pound for pencol. The costs to produce 600 pounds of each analgesic are as follows:
Chemicals ....... $ 8,500
Direct labor ...... 6,735
Overhead ........ 9,900
The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is $ 1.30. Shipping costs $ 0.10 per pound. Zanda could process depryl further by grinding it into a fine powder and then molding the powder into tablets. The tablets can be sold directly to retail drug stores as a generic brand. If this route were taken, the revenue received per bottle of tablets would be $ 4.00, with 10 bottles produced by every pound of depryl. The costs of grinding and tableting total $ 2.50 per pound of depryl. Bottles cost $ 0.40 each. Bottles are shipped in boxes that hold 25 bottles at a shipping cost of $ 1.60 per box.
1. Should Zanda sell depryl at split-off, or should depryl be processed and sold as tablets?
2. If Zanda normally sells 265,000 pounds of depryl per year, what will be the difference in profits if depryl is processed further?
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