Question

A manufacturing company currently produces 1,000 units of a product at a cost of $5,000. The units sell for $7,000. Alternatively, the company can process further to produce a refined product that will sell for $10,000. The additional processing will cost $4,000. The company should:

a. process further because net incremental income will be $6,000

b. sell as is because processing further will reduce income by $6,000 c. sell as is because processing further will reduce income by $1,000 d. process further because net incremental income will be $1,000

Answer 1

c. sell as is because processing further will reduce income by $1,000

OPTION C is correct

Step-by-step explanation:

From the data above, the profit for the current production of 1000 units can be calculated as this;

(Price of the product sold) - (cost for the production)

= $7000 - $5000

= $2000

Therefore, the current profit made is $2000

If the product is processed further, the profit made can be calculated as well,

(Price of the product sold) - (cost for the production)

= $10000 - ( $5000 + $4000)

= $10000 - $9000

= $1000

It can be deducted that further processing of the product could make the profit to reduce by $1000.

Therefore, they should sell as is because processing further will reduce income by $1,000