Answer:
Product A should be processed further
Explanation:
Scenario 1
Cobe company produces only product A, we have:
Number of units (n) = 19,000, Unit cost (u) = $15
Cost of Production (C) = number of units * unit price
C = n * u = 19,000 * 15
C = 285,000
Revenue = Sale Price - Cost of Production
Revenue = $ (430,000 - 285,000)
Revenue = $145,000
Scenario 2 (Alternative option)
In this case, product A is converted into products B and C; in doing so, an additional cost of $300,000 is incurred
Cobe company produces products B & C, we have:
Production cost of product A = $285,000,
Number of units (product B) = 5,300, Selling price (product B) = $100,
Number of units (product C) = 11,600, Selling price (product C) = $54, Additional cost (X) = $300,000
Revenue = Revenue (product B) + Revenue (product C)
Revenue = number of units * selling price
Revenue = (5,300 * 100) + (11,600 * 54)
Revenue = $1,156,400
The Net Revenue is given by the difference between the Total Revenue and the additional cost incurred
Net Revenue = Revenue - (Production cost + Additional cost)
Net Revenue = $ [1,156,400 - (285,000 + 300,000)]
Net Revenue = $571,400
The Net Revenue from Scenario 2 is most 4x that from Scenario 1
Hence, Product A should be processed further as it will bring maximum profit to Cobe company
