Van Dusen Corporation produces several products from processing one ton of a mineral called Gummo. The material and processing costs for one ton of Gummo total $90,000, 10% of which is allocated to product Zeppo. One ton of Gummo yields 5,000 units of Zeppo which can be sold at this point for $15 per unit. Alternatively, Zeppo can be further processed into 5,000 units of a product called Chico at a total cost of $15,000 and then sold for $20 per unit. What is the financial advantage (or disadvantage) of further processing Zeppo into Chico?
A) A financial advantage of $1,000.
B) A financial advantage of $10,000.
C) A financial advantage of $25,000.
D) A financial disadvantage of $15,000.

Question

Quizplus · Accepted Answer

The financial advantage of further processing Zeppo into Chico is calculated by comparing the net revenue of selling Zeppo as is versus processing it into Chico. Selling Zeppo as is would yield $75,000 (5,000 units * $15/unit). Processing into Chico costs an additional $15,000, making the total cost $105,000 ($90,000 + $15,000). Selling Chico yields $100,000 (5,000 units * $20/unit). The difference in net revenue is $100,000 (selling Chico) - $75,000 (selling Zeppo) = $25,000, minus the additional processing cost of $15,000, resulting in a net financial advantage of $10,000.

Van Dusen Corporation Produces Several Products from Processing One Ton