Walters manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand.Alternatively,it can be further processed at a cost of $12,000 and converted into 12,000 units of Deluxe and 6,000 units of Super.The selling price of Deluxe and Super are $30 and $20,respectively.The incremental net income of processing further would be:
A)$40,000.
B)$28,000.
C)$18,000.
D)$44,000.
E)$12,000.

Question

Quizplus · Accepted Answer

The first step is to calculate the total revenue that can be generated by selling the 20,000 units as they are:
Total Revenue = Selling Price x Number of Units on Hand
Total Revenue = $22 x 20,000
Total Revenue = $440,000

The second step is to calculate the incremental net income of processing further:
Incremental Net Income = Total Revenue from further processing - Cost of further processing
Total Revenue from further processing = (Number of units of Deluxe x Selling price of Deluxe) + (Number of units of Super x Selling price of Super)
Number of units of Deluxe = 12,000
Selling price of Deluxe = $30
Number of units of Super = 6,000
Selling price of Super = $20
Total Revenue from further processing = (12,000 x $30) + (6,000 x $20)
Total Revenue from further processing = $420,000

Cost of further processing = $12,000

Incremental Net Income = $420,000 - $12,000
Incremental Net Income = $408,000

Therefore, the best choice(s) is B, to process further and generate an incremental net income of $28,000.

Walters Manufactures a Specialty Food Product That Can Currently Be