Question

American Chemical Company manufactures a chemical compound that is sold for $56 per gallon. A new variant of the chemical has been discovered, and if the basic compound were processed into the new variant, the selling price would be $80 per gallon. American expects the market for the new compound variant to be 8,700 gallons initially and determines that processing costs to refine the basic compound into the new variant would be $139,200.
Required:
a. What would be the effect on total profit if American produces the new compound variant?
b. Should American produce the new compound variant?

Answer 1

Answer:

Further processing gives additional net income of $69,600

It is highly recommended that American Chemical Company should produce the new compound variant

Explanation:

The below incremental income analysis would help us decide whether producing the new variant is worthwhile.

Sales price of the new variant                           $80

less:sales price of chemical compound            ($56)

incremental sales price                                      $24

Total incremental revenue($24*8700)             $ 208,800

less:incremental processing costs                   ($139,200)

incremental net income                                     $ 69,600

By processing the old chemical to give the new compound variant American Chemical Company would record increase in net income of $ 69,600,hence it would be unwise if the company refuse to produce the new compound variant