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What is the effect on profits of accepting an offer

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Question - Hi-Performance, Inc. produces a fuel additive that increases engine horsepower. Chemical ZYX3 is an ingredient of the fuel additive. Hi-Performance currently produces Chemical ZYX3 in its own factory. Hi-Performance uses 100,000 gallons each year in its production process. An analysis of the costs that Hi-Performance incurs producing Chemical ZYX3 is as provided below.

Direct materials $10.00

Direct labor $5.00

Other variable costs $2.50

Fixed costs $5.00

Total $22.50

Total fixed costs $5,000,000

Quantity needed (gallons) 100,000

Hi-Performance incurs $5 million of fixed costs each year.

What is the effect on profits of accepting an offer from Additives-R-Us to supply Chemical ZYX3 at a price of $16 per gallon?

Reference no: EM133170045

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