A chemical company spent $531,000 to produce 152,000 gallons of a chemical that

Question

A chemical company spent $531,000 to produce 152,000 gallons of a chemical that can be sold for $5.20 per gallon. This chemical can be further processed into a weed killer that can be sold for $9.20 per gallon. It will cost $250,000 to process the chemical into the weed killer. Which of the following is true? O A. If the company decides to process further, it ill increase operating income by $617,400. O B. If the company decides to process further, it will decrease operating income by $1,398,400. O C. If the company decides to process further, it will increase operating income by $358,000. O D. To maximize operating income, the company should continue to sell the chemical as is

Explanation / Answer

The answer is ”C. If the company decides to process further, it will increase operating income by $358,000”.

Incremental revenue = (9.20 - 5.20) x 152,000 = $608,000

Incremental expenditure = $250,000

As incremental revenue is more than incremental expenditure so, increase in operating income = 608,000 - 250,000 = $358,000.

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