Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.
- The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

Question

Quizplus · Accepted Answer

The net advantage of processing further is calculated by comparing the additional revenue from selling Premium Green and Green Deluxe with the additional processing costs. The revenue from selling 10,000 bags of Premium Green at $8 each and 3,000 bags of Green Deluxe at $6 each is $80,000 + $18,000 = $98,000. The revenue from selling 10,000 bags of Green Health as is would be $90,000. The additional processing cost is $2,000. Therefore, the net advantage is $98,000 - $90,000 - $2,000 = $6,000.

Maxim Manufactures a Hamster Food Product Called Green Health