Question $4$

ABC Chemical Company $(ABC)$ produces three products $A,B$ and $C.$ Each month, all three

products are under a common process costing $$180,000($share equally by each product$)$ and

produces $90,000$ gallons $(30,000$ gallons of each$)$ of chemical. All three products have no market

value until the additional processes. The additional costs for such conversions are $$100,000,$

$$80,000$ and $$220,000$ for A$,$ B and C respectively. Each of these products can be sold as is$,$ or each

can be processed further and sold for a higher price. Product A$,$ B and C can be sold for $$10,$$$8$ and

$$12$ per gallon.

ABC is considering the possibility to process further of product $B$ and $C$ to product $B-$plus and $C-$

plus. This will incur new variable and fixed costs for additional capacity. The additional processing

costs for this process is $$150,000$ and $$200,000.$ Both products can be sold for $$15$ per gallon.

Analysis reveals the following percentages of variable costs in each component.

Required:

$($a$)$ Calculate ABC's total monthly gross profit $($hint: sales $-$ cost of goods sold$)$ assuming there is no

processed further and all products can be sold. Show your workings.

$($b$)$ Using incremental analysis, determine and explain to ABC whether they should process further

or not. Show your alternatives and indicate the differences.