Question

Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $3.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.15 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8.15 and $6.15 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

Answer 1

Answer:

It is more profitable to continue processing.

Explanation:

Giving the following information:

Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $3.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.15 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8.15 and $6.15 per bag, respectively.

Previous split off point:

Income= 10,000*(9.15 - 3.8) - 10,000= $43,500

Post split off point:

Income= 10,000*8.15 + 3,000*6.15 - 10,000*3.8 - 12,000= $49,950

It is more profitable to continue processing.