Lolly Water Company makes lemonade Lolly Water Company norma

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 flavour. 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: (a) Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (b) If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (c) Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.

Solution

a)

profit will increase by .20*34000=$ 6800 from further prossing to raspberry lemonade.further processing should be done

b)

There will be a loss of [-.30*34000] = -$10200 from further processing so further processing should not be done.

3)