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Lolly Water Company makes lemonade
Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavor. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle. Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade: Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
Expert Solution
If I were the head, owner or the manager of the Lolly Water Company, I would definitely vote to process the lemonade further into raspberry-lemonade. The reason for my judgement is this computation: Lemonade Total cost= manufacture cost + variable selling cost $2.5 = $1.5 + $1.0 Income = Selling price Total Cost $1.5 = $4 - $2.5 Raspberry-Lemonade Total cost= manufacture cost + variable processing cost + variable selling cost $3.80 = $1.5 + $1.5 + $0.80 Income= Selling price Total Cost $1.7 = $5.5 - $3.80 As you can see on the computation, the company will receive more income if the product will upgrade from lemonade to raspberry-lemonade flavor.
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