Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows:
Refer to Exhibit 22-5. How much larger or smaller would Imperial's earnings be if the company produced Hawaiian instead of Tropical with the 1,000 available direct labor hours?

Question

Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows:
 Refer to Exhibit 22-5. How much larger or smaller would Imperial's earnings be if the company produced Hawaiian instead of Tropical with the 1,000 available direct labor hours?

Quizplus · Accepted Answer

To determine the difference in earnings between producing Tropical and producing Hawaiian, we need to subtract the total cost of producing Hawaiian from the total revenue from selling Hawaiian, and then subtract the total cost of producing Tropical from the total revenue from selling Tropical, and then subtract the two results. The calculation is as follows:

Total revenue from selling Hawaiian = $8 × 3,000 = $24,000
Total cost of producing Hawaiian = $5 × 1,000 = $5,000
Profit from producing Hawaiian = $24,000 - $5,000 = $19,000

Total revenue from selling Tropical = $6 × 2,000 = $12,000
Total cost of producing Tropical = $3 × 1,000 = $3,000
Profit from producing Tropical = $12,000 - $3,000 = $9,000

Difference in earnings = Profit from producing Hawaiian - Profit from producing Tropical
= $19,000 - $9,000
= $10,000

Therefore, Imperial's earnings would be $10,000 smaller if the company produced Hawaiian instead of Tropical with the 1,000 available direct labor hours. The answer is D.

Exhibit 22-5 Imperial Company Manufactures Two Types of Fruit Drinks