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Rio Grande Company has a process that results in 6,000 pounds of Product A that can be sold for $8 per pound
Rio Grande Company has a process that results in 6,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $40,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? Multiple Choice Process further the company will be better off by $4,000 Sell now, the company will be better off by $4.000, Sell now, the company will be better off by 540.000
Expert Solution
The correct answer is Option (B) Sell now, the company will be better off by $4000.
The Incremental Revenue if the company process further is ( 14 - 8 ) X 6000units = $36000.
Incremental Cost is $40000 if the company further process the product.
So the the company will incure loss ( $36000 - $40000 ) = $4000.
It is seen from the above calculation clearly that Option (A) and Option (C) is incorrect. Option(A) is incorrect cause if the company further process the product then it will incure loss. Option (c) is incorrect cause if the company sell now it will be better sell of by ( $8 X 6000 units ) = $48000 not $40000.
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