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6 April, 07:34

A company produces a product that currently costs $8 in variable costs and $2 in fixed costs. It sells the product for $14. If processed further, the company will spend an additional $6 in variable costs and $2 in fixed costs. Each unit would then be sold for $24. Why would the company choose to process further?

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  1. 6 April, 10:59
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    The net profit after processing is greater than the net current profit

    Therefore,

    The company should choose to process further

    Explanation:

    Data provided in the question:

    Current variable cost = $8

    Current fixed cost = $2

    Total current cost = $8 + $2 = $10

    Current selling price = $14

    Therefore,

    Net current profit = Current selling price - Current total cost

    = $14 - $10

    = $4

    Now,

    When the product is processed further

    Additional variable cost = $6

    Total variable cost = $8 + $6 = $14

    Additional fixed cost = $2

    Total fixed cost = $2 + $2 = $4

    Total cost = $14 + $4 = $18

    Selling price after processing = $24

    Therefore,

    Net profit = Selling price after processing - Total cost

    = $24 - $18

    = $6

    Since,

    The net profit after processing is greater than the net current profit

    Therefore,

    The company should choose to process further
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