Maxim manufactures a cat 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 cat 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.
- If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

Question

Quizplus · Accepted Answer

Maxim currently has 10,000 bags of Green Health on hand. If the company chooses to sell them as-is, the gross profit would be:
Revenue from selling Green Health = 10,000 x $9 = $90,000
Total variable cost = 10,000 x $1.80 = $18,000
Total gross profit = $90,000 - $18,000 - $10,000 = $62,000

If Maxim chooses to process the Green Health into Premium Green and Green Deluxe, the additional processing cost would be $2,000. This would result in the following production and sales:

Premium Green:
- 10,000 bags produced
- Selling price of $8 per bag
- Variable production cost per bag of $1.80
- Total variable cost for Premium Green = 10,000 x $1.80 = $18,000
- Revenue from selling Premium Green = 10,000 x $8 = $80,000
- Gross profit from Premium Green = $80,000 - $18,000 = $62,000

Green Deluxe:
- 3,000 bags produced
- Selling price of $6 per bag
- Variable production cost per bag of $1.80
- Total variable cost for Green Deluxe = 3,000 x $1.80 = $5,400
- Revenue from selling Green Deluxe = 3,000 x $6 = $18,000
- Gross profit from Green Deluxe = $18,000 - $5,400 = $12,600

Total gross profit from processing Green Health into Premium Green and Green Deluxe would be:
Gross profit from Premium Green + Gross profit from Green Deluxe - Additional processing cost = $62,000 + $12,600 - $2,000 = $72,600

Therefore, the best choice for Maxim is to process Green Health into Premium Green and Green Deluxe, which would result in a total gross profit of $72,600.

Maxim Manufactures a Cat Food Product Called Green Health