Question

Smith Holdings produces a product that can be sold as-is or processed further. Johnson has already spent $50,000 to produce 1,250 units that can be sold now for $67,500 to another manufacturer. Alternatively, Johnson can process the units further at an incremental cost of $250 per unit. If Johnson does process further, the units could be sold for $375 each. Compute the incremental income (or loss) if Johnson processes further.

Answer 1

Sales Revenue of further processed one unit	$              375
Sales Revenue of existing one unit	54
(67500 ÷ 1250 units = $54)
incremental revenue of one unit	321
Incremental cost of further processing	250
Incremental income per unit	71
total incremental income (71 x 1250)	$        88,750