Question

Maxim manufactures a hamster food product called Green Health Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $3.60 and total fixed costs are $10,000. The hamster food can be sold as it is for $8.95 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,200 cost. The additional processing will yield 10,000 bags of Premium Green and 3,200 bags of Green Deluxe, which can be sold for $7.95 and $5.95 per bag, respectively. The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be: Multiple Choice 0 $2.200 0 $9,040 0 O $98,540 0 $96,340. 0 $6.840.

Answer 1

Revenues from premium green and green deluxe = (10,000 * $7.95) + (3,200 * $5.95)

= $98,540

Additional revenue = Revenues from premium green and green deluxe - Revenues from green health

= $98,540 - (10,000 * $8.95)

= $9,040

Net advantage = Additional revenue - Additional expenses

= $9,040 - $2,200

= $6,840

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Relevant cost per unit = Direct materials + Direct labor + Avoidable overhead

= $9.3 + $23.3 + ($15.3 *60%)

= $41.78

Incremental savings = $43.28 - $41.78

= $1.5 savings per unit