Question

Assume a company purchases honeycombs from beekeepers for $2.00 a pound. The honey can be sold in raw form for $3.20 a

pound or it can be used to make honey drop candies. Each package of candies contains three-quarters of a pound of honey and
can be sold for $4.40. In addition to the cost of the honey, making and selling each container of candies incurs additional variable
costs of $1.10 per unit.
The monthly fixed costs associated with making the candies include:
Master candy-maker's salary
Depreciation of candy-making equipment
Salary of salesperson dedicated to this product
Total fixed costs
$ 3,500
400
2,000
$ 5,900
The candy-making equipment does not wear out through use and it has no resale value. Assuming the company makes and sells
8,000 containers of candy, what is the financial advantage (disadvantage) of continuing to process raw honey into candies?

Answer 1

The financial advantage of continuing to process raw honey into candies is $10,900.

Step-by-step explanation:

To determine the financial advantage or disadvantage of continuing to process raw honey into candies, we need to calculate the total costs and revenues associated with each option.

Option 1: Selling honey in raw form

• Cost of honey: $2.00 per pound
• Revenue from selling honey: $3.20 per pound

Option 2: Making honey drop candies

• Cost of honey: $2.00 per pound x 0.75 pounds per container = $1.50 per container
• Cost of making and selling each container of candies: $1.10 per container
• Revenue from selling each container of candies: $4.40 per container

Fixed costs associated with making the candies: $5,900 per month

Now, using the information provided that the company makes and sells 8,000 containers of candy, we can calculate the financial advantage or disadvantage of each option.

Option 1:

• Total cost of honey: $2.00 per pound x 8,000 pounds = $16,000
• Total revenue from selling honey: $3.20 per pound x 8,000 pounds = $25,600
• Profit from selling honey: Total revenue - Total cost = $25,600 - $16,000 = $9,600

Option 2:

• Total cost of honey: $1.50 per container x 8,000 containers = $12,000
• Total variable cost of making and selling the candies: $1.10 per container x 8,000 containers = $8,800
• Total revenue from selling the candies: $4.40 per container x 8,000 containers = $35,200
• Total fixed costs: $5,900
• Profit from selling the candies: Total revenue - Total variable cost - Total fixed costs = $35,200 - $8,800 - $5,900 = $20,500

Comparing the profits from each option, the financial advantage of continuing to process raw honey into candies would be:

• Profit from selling honey: $9,600
• Profit from selling candies: $20,500

Therefore, the financial advantage of continuing to process raw honey into candies is $20,500 - $9,600 = $10,900.