A chemical company spent $532,000 to produce150,000 gallons of a chemical that can be sold for $4
80 per gallon. This chemical can be further processed into a weed killer that can be sold for $9.20 per gallon. It will cost $270,000 to process the chemical into the weed killer. Which of the following is true?
A) To maximize operating income, the company should continue to sell the chemical as is.
B) If the company decides to process further, it will increase operating income by $578,000.
C) If the company decides to process further, it will increase operating income by $390,000.
D) If the company decides to process further, it will decrease operating income by $1,380,000.
C .C)
As is Process further
Sales revenue $720,000 $1,380,000
Less: Cost incurred (532,000 ) (802,000 )
Operating income $188,000 $578,000
Increase in operating income on account of further processing $390,000 ($578,000 - $188,000 ).
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