Question

It costs Hickory, Inc. $233 per unit to manufacture 1600 units per month of a product that it can sell for $310 each. Alternatively, Hickory could sell the units at an earlier stage of processing, which would save $76 per unit. Hickory could sell the simpler product for $180 each. How would selling the simpler product affect Hickory's profit? Multiple Choice Profit would decrease by 506,400 Profit would increase by 543,200. oo Profit would decrease by 543.200 0 Profit would increase by 506,400

Answer 1

If product is sold after completion

Cost price per unit of Product = $233

Selling price per unit = $310

Profit per unit = Selling price per unit - Cost price per unit
                     = $310 - $233
                     = $77

If product is sold at an earlier stage

cost saving will be $76 per unit.

Hence, The cost per unit of simpler product = $233 - $76
                                                                      = $157

selling price per unit of simpler product = $180

Profit per unit of simpler product
   = selling price per unit of simpler product-cost per unit of simpler product
   = $180 - $157
   = $23

Effect of selling of simpler product on Hickroy's Profit

Profit per unit in simpler product is ($77 - $23) = $54 less than if the product is processed further.

Hence if simpler product is sold, profit would decrease by = 1,600 x $54 = $86,400

First option : Profit would decrease by $86,400 is the correct Answer.