Marsden manufactures a cat food product called Special Export. Marsden currently

Question

Marsden manufactures a cat food product called Special Export. Marsden currently has 10,000 bags of Special Export on hand. The variable production costs per bag are $2.00 and total fixed costs are $10,000. The cat food can be sold as it is for $9.25 per bag or be processed further into Prime Cat Food and Feline Surprise at an additional $2,200 cost. The additional processing will yield 10,000 bags of Prime Cat Food and 3,200 bags of Feline Surprise, which can be sold for $8.25 and $6.25 per bag, respectively. The net advantage (incremental income) of processing Special Export further into Prime and Feline Surprise would be:

Explanation / Answer

Hi,

Please find the detailed answer as follows

Income (if the bags are sold as it is) = 10000*8.75 (Sales Value) = 87500

Income if further processing takes place = 10000*7.75 + 3400*5.75 = 97050

Increase in Revenue = 97050 - 87500 = 9550

Incremental Income = Increase in Revenue - Additional Cost of Processing = 9550 - 2400 = 7150

Answer is 7150.

Thanks.

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