DeBaca\'s Fish House buy fish from local fishermen and sells the fish to the pub

Question

DeBaca's Fish House buy fish from local fishermen and sells the fish to the public from its booth at the public market. Lately, the fish house has had a number of requests for smoked salmon and ha seceded to investigate whether that would be a profitable item. The salmon DeBaca's buys now costs the company $2 per pound. DeBaca's would have to take the new salmon to a smokehouse to have it smoked, which would increase the total cost to $3.25 for each pound of salmon The salmon currently sells for $5 50 per pound but would sell for $6.50 per pound if it were smoked. Required On the basis of the fact given, would it be profitable to smoke the salmon? Why or why not? If the cost of the smoking process could be reduced by $0.50 per pound, would it be profitable to smoke the salmon? What qualitative factors should be considered before making a final decision?

Explanation / Answer

Present condition:No processing

Contribution per pound of salmon=Sale-Variable cost per pound

=$5.5-2

=$3.5 per pound

Proposed condition:After processing

Contribution per pound of salmon=Sale-Variable cost per pound

=6.5-3.25

=$3.25 per pound

HEnce it is not advisable to further process as profits would decline

b) If the cost of processing declines by $0.5 per pound

Revised COntribution=6.5-2.75

=$3.75 per pound

In this case we should approve the decision of further processing

c)Qualitative measures such as quality and normal loss shall be considered as well as other factors associated with the line should be taken into account

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