Maxim manufactures a hamster food product called Green Health. Maxim currently h
ID: 2484632 • Letter: M
Question
Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $2.30 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.55 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,500 cost. The additional processing will yield 10,000 bags of Premium Green and 3,500 bags of Green Deluxe, which can be sold for $8.55 and $6.55 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:
Explanation / Answer
Maxim manufactures Green Health 10000 Bags Selling Price $ 9.55 Per Bag Variable Production cost $ 2.30 Per Bag Total Fixed Cost $ 10,000.00 Presently Product Green Health Total Selling Price $ 95,500.00 Variable cost $ 23,000.00 Contribution $ 72,500.00 Total fixed cost $ 10,000.00 Net Profit $ 62,500.00 After further Processing Product Premium Green Green Deluxe Total selling Price $ 85,500.00 $ 22,925.00 $ 108,425.00 Additional Income $ 108,425.00 Less: Additional cost $ 2,500.00 Less: Contribution lost $ 72,500.00 Total Incremental Income $ 33,425.00