Asay & Co. provides water treatment supplies to cities and counties. The R&D department has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them.
Asay projects the following revenue and cost information for each of the products:
Compound:
Sales Price: $1,225/container
Total sales in Year 1: 15,000 containers
Direct materials: $115/container
Direct Labor: $15/hour, each container requires 6 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each filter only requires 10 machine hours)
Filter:
Sales Price: $1,300/filter
Total sales in Year 1: 25,000 filters
Direct materials: $75/filter
Direct Labor: $15/hour, each filter requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each container requires 2 machine hours)
What would be the net difference in income of producing the filter instead of the compound?

Question

Asay & Co. provides water treatment supplies to cities and counties. The R&D department has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them. 
Asay projects the following revenue and cost information for each of the products:
Compound:
Sales Price: $1,225/container
Total sales in Year 1: 15,000 containers
Direct materials: $115/container
Direct Labor: $15/hour, each container requires 6 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each filter only requires 10 machine hours)
Filter:
Sales Price: $1,300/filter
Total sales in Year 1: 25,000 filters
Direct materials: $75/filter
Direct Labor: $15/hour, each filter requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each container requires 2 machine hours)
What would be the net difference in income of producing the filter instead of the compound?

Quizplus · Accepted Answer

The Answer of Asay & Co. provides water treatment supplies to cities and counties. The R&D department has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them. 
Asay projects the following revenue and cost information for each of the products:
Compound:
Sales Price: $1,225/container
Total sales in Year 1: 15,000 containers
Direct materials: $115/container
Direct Labor: $15/hour, each container requires 6 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each filter only requires 10 machine hours)
Filter:
Sales Price: $1,300/filter
Total sales in Year 1: 25,000 filters
Direct materials: $75/filter
Direct Labor: $15/hour, each filter requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Fixed overhead allocation: $60/machine hour (each container requires 2 machine hours)
What would be the net difference in income of producing the filter instead of the compound?

Asay & Co Provides Water Treatment Supplies to Cities and Counties