Primack Pharmaceutical 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, rhinime and stercol, 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 rhinime and 600 pounds of stercol are produced. After drying, rhinime and stercol are sold to compa- nies that process them into their final form. The selling prices are $15 per pound for rhinime and $37 per pound for stercol. The costs to produce 600 pounds of each analgesic are as follows:
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Chemicals
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$9,360
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Direct labor
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8,200
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Overhead
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19,900
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The analgesics are packaged in 20-pound bags and shipped. The cost of each bag is $1.30. Shipping costs $0.15 per pound.
Primack could process rhinime 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 is taken, the revenue received per bottle of tablets would be $5.00, with 10 bottles produced from every pound of rhinime. The costs of grinding and tableting total $2.50 per pound of rhinime. Bottles cost $0.50 each. Bottles are shipped in boxes that hold 25 at a shipping cost of $1.70 per box.
Required
1. Should Primack sell rhinime at split-off, or should rhinime be processed and sold as tablets?
2. If Primack normally sells 265,000 pounds of rhinime per year, what will be the difference in profits if rhinime is processed further?