Question

American Chemical Company manufactures a chemical compound that is sold for $52 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 $83 per gallon. American expects the market for the new compound variant to be 8,000 gallons initially and determines that processing costs to refine the basic compound into the new variant would be $160,000.a. What would be the effect on total profit if American produces the new compound variant?If American produces the new compound, profit will increase/decrease by ?

Answer 1

Answer:

a. The total profit would be positively affected as it increases

Explanation:

1. We calculate the value of revenue per 8000 gallons with the initial chemical compound and processed into the new variant

Revenue Initial Chemical Compound= 8000 gallons X ($52/gallon)

Revenue Initial Chemical Compound= $ 416.000

Revenue Chemical compound processed into the new variant=8000 gallons X ($83/gallon)

Revenue Chemical compound  processed into the new variant= $ 664.000

2. If we consider that the other production costs will be the same for the two chemical compounds, then the only difference will be the processing cost to refine the basic compound into the new variant. For this reason, we substract only the value of processing the basic compound into the new variant for the revenue of this.

$ 664.000 - $160.000= $504.000

3. The benefit values for each case are:

Initial Chemical Compound: $416.000

Chemical compound  processed into the new variant: $504.000

In conclusion, greater benefit is obtained by processing the basic compound in the new variant than if the basic compound were sold only