National Chemical Company manufactures a chemical compound that is sold for $55 per gallon. A new variant of the chemical has been discovered, and if the basic compound were processed into the new variant, the selling price would be $78 per gallon. National expects the market for the new compound variant to be 8,300 gallons initially and determines that processing costs to refine the basic compound into the new variant would be $157,700. Required: a. What would be the effect on total profit if National produces the new compound variant?

National Chemical Company

New Variant of a Chemical Compound:

The effect on total profit if National produces the new compound variant is that total profit increases by $33,200

Explanation:

a) Data:

Selling price of old chemical = $55

Selling price of fined chemical = $78

Initial demand for the new compound = 8,300 gallons

Refining costs for the new compound = $157,700

b) Calculations:

Profit from new fined chemical = $23 ($78 - 55)

Differential Sales revenue =  $190,900 ($23 x 8,300)

Differential processing costs $157,700

Effect on total profit =              $33,200

c) Refining a chemical always add some value to the chemical.  The additional value added is the differential sales revenue that National generates minus the additional processing costs involved to get the chemical refined.

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