Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

$68,000

Explanation:

The formula to compute the gross profit is shown below:

Gross profit = Sales revenue - cost of goods sold

where,

Sales revenue = Number of bags in premium green × selling price per unit + number of bags in green deluxe × selling price per unit

= 10,000 × $8 + 3,000 × $6

= $80,000 + $18,000

= $98,000

And, the cost of goods sold is

= variable cost of green health + total fixed cost + additional processing cost

= 10,000 × $1.8 + $10,000 + $2,000

= $18,000 + $12,000

= $30,000

So, the gross profit is

= $98,000 - $30,000

= $68,000

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