A company spent $750,000 to produce 225,000 gallons of a chemical free product that can be sold for $6
00 per gallon. This product can be further processed into a household cleaning solution that can be sold for $8.50 per gallon. It will cost $360,000 to process the chemical free product into the household cleaning solution.
Prepare a differential analysis to determine if the product should be processed further. Discuss the results.
What will be an ideal response
Sell Process
Further
Difference
Expected revenue from selling:
(225,000 gallons x $6.00 )
$1,350,000
Expected revenue from selling:
(225,000 gallons x $8.50 )
$1,912,500
$562,500
Additional costs of processing (360,000 ) (360,000 )
Total net revenue $1,350,000 $1,552,500 $202,500
The company should further process the household cleaning solution. The result will be an increase in total net revenue of $202,500.
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