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Product T is produced for $5.90 per pound. Product T can be sold without additional processing...

Question:

Product T is produced for $5.90 per pound. Product T can be sold without additional processing for $7.10 per pound, or processed further into Product U at an additional cost of $0.74 per pound. Product U can be sold for $8.00 per pound.

Calculate a differential analysis dated August 2 on whether to sell Product T (Alternative 1) or process further into Product U (Alternative 2).

Gross Profit:

Gross profit is the third line in the Income Statement that shows the difference between the Total Net Sales and the Cost of Goods Sold. It is the profit or earnings of the company before deducting the operating, interest and taxes payment. A higher net sales and lower cost of sales will generate a higher gross profit and a lower sales and higher cost of sales will result to a lower gross profit.

Answer and Explanation:

Further processing of the product, which is Product U, will earn the company a higher profit than Product T by $0.16 per pound.

Product T
Selling Price $7.1
Less: Cost 5.9
Gross Profit $1.2
Product U
Selling Price $8
Less: Cost ($5.9 +$0.74) 6.64
Gross Profit $1.36


Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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