Serenity Garden Inc.
Serenity Garden Inc. produces and sells a variety of garden accessories. One of the product lines the company makes is unpainted gnome statues that come in three sizes: small, medium, and large. The company is considering painting the gnomes. The following information is available regarding unpainted and painted gnomes:
$\begin{array}{lrrr}
&\text { Small}&\text { Medium } & \text { Large }\
\text { Initial sales price } & \$ 40 & \$ 60 & \$ 80 \
\text { Initial cost } & 15 & 20 & 23 \
\text { Sales price after painting } & 47 & 70 & 95 \
\text { Cost of painting } & 8 & 9 & 11 \
& & & \
\text { Number sold per year } & 500 & 1000 & 400
\end{array}$
-What is the maximum amount that net income could increase each year with further processing?

Question

Quizplus · Accepted Answer

According to the table, the total revenue increase from further processing is $13,000 ($50,000-$37,000). The cost of further processing is $10,400, and the increase in fixed costs is $3,000. Therefore, the net income increase from further processing is $600 ($13,000-$10,400-$3,000). The question asks for the maximum amount that net income could increase each year, so we need to assume that the company can sell all of its processed inventory, and the fixed costs do not increase beyond $3,000. In this case, the net income increase is $600 per year. Therefore, the maximum amount that net income could increase each year with further processing is $600. The only answer that matches this value is B.

Serenity Garden Inc -What Is the Maximum Amount That Net Income Could Increase