Pep Manufacturing produces Product K in batches of 4,000 gallons at $.60 per gal

Question

Pep Manufacturing produces Product K in batches of 4,000 gallons at $.60 per gallon. Product K can be sold without further processing for $0.80 per gallon. Product K can be processed further to yield Product G, which can be sold for $1.25 per gallon. Product G requires additional processing costs at $1,650 per batch.
Instructions
Compute the incremental income from further production of one batch of Product K.

Is the incremental income $950 since that's how much they would be the net income of selling product G or would it be $150 because that's how much the net income increases by producing product G?

Explanation / Answer

If we do not further process to product G,
Revenue from product F (4000 gallons x $0.8/gallon) = $3200
Cost of product F = (4000 gallons x $0.6/gallon) = $2400
Net income = $3200 - $2400 = $800

If we further process to yield product G,

Revenue from product G (4000 x 1.25) = $5000

Total cost of product G = $2400 + $1650 = $4050

Net income = 5000 - 4050 - $950

From the calculations shown above, it is very clear that it is financially feasible to further process to yield product G. Incremental income refers to the EXCESS income comparing between 2 options. Thus, the incremental income is $150 (950 - 800)

Hope this helps!

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