A company produces a product that currently costs $8 in variable costs and $2 in fixed costs. It sells the product for $14. If processed further, the company will spend an additional $6 in variable costs and $2 in fixed costs. Each unit would then be sold for $24. Why would the company choose to process further?

Question

Tatum Nolan

Business

3 August, 20:12

A company produces a product that currently costs $8 in variable costs and $2 in fixed costs. It sells the product for $14. If processed further, the company will spend an additional $6 in variable costs and $2 in fixed costs. Each unit would then be sold for $24. Why would the company choose to process further?

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Answers (1)

Know the Answer?

Lizeth Carey · Answer 1

The net profit after processing is greater than the net current profit

Therefore,

The company should choose to process further

Explanation:

Data provided in the question:

Current variable cost = $8

Current fixed cost = $2

Total current cost = $8 + $2 = $10

Current selling price = $14

Therefore,

Net current profit = Current selling price - Current total cost

= $14 - $10

= $4

Now,

When the product is processed further

Additional variable cost = $6

Total variable cost = $8 + $6 = $14

Additional fixed cost = $2

Total fixed cost = $2 + $2 = $4

Total cost = $14 + $4 = $18

Selling price after processing = $24

Therefore,

Net profit = Selling price after processing - Total cost

= $24 - $18

= $6

Since,

The net profit after processing is greater than the net current profit

Therefore,

The company should choose to process further