Question

Problem 1- Decision making case, differential profit analysis

Rocket Inc. provides water treatment supplies to cities and counties. The product development dept. has developed two potential new products: one is a new organic chemical compound that will bind with heavy metals and then be filtered out of the water, and the other is a plant-based filter that will actually filter out the metals. The products are similar enough to be produced on existing equipment, but the company would not be able to produce both of them.   Breckitt projects the following revenue and cost information for each of the products:
Organic chemical compound product:
Sales Price: $2,450/container
Total sales in Year 1: 15,000 containers
Direct materials: $230/container
Direct Labor: $15/hour, each container requires 12 hours of direct labor
Variable overhead allocation: $50/direct labor hour
Plant based filter product:
Sales Price: $2,600/filter
Total sales in Year 1: 25,000 filters
Direct materials: $150/filter
Direct Labor: $15/hour, each filter requires 25 hours of direct labor
Variable overhead allocation: $50/direct labor hour
What would be the net difference in income of producing the filter instead of the compound?

Answer 1

Organic chemical compound

Direct material $230*15000=3450000

Direct labour $12*15=180*15000=2700000

Prime cost (a) $6150000

Variable overhead $50*12=600*15000=

Factory cost (b) 9000000

Profit (a+b-c) 21, 600,000

Sales (c) $15000*2450=36750000

Plant based filter

Direct material 150*25000=3750000

Direct labour 15*25*25000=9375000

Prime cost (a)13125000

Variable overhead 50*25*25000

Work cost (b)31,250,000

Profit (a+b-c) 20625000

Sales (c) 25000*2600=65,000, 000

Organic chemical products is more profitable than plant based product