Question

Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish.

Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.20 a pound to make, and it has a selling price of $7.40 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $5.00 per jar.

This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct variable costs involved in the processing of a jar of silver polish are:

Other ingredients	$	0.55
Direct labor		1.32
Total direct cost	$	1.87

Overhead costs associated with processing the silver polish are:

Variable manufacturing overhead cost		25	% of direct labor cost
Fixed manufacturing overhead cost (per month)
Production supervisor	$	3,400
Depreciation of mixing equipment	$	1,500

The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 14,500 jars of polish per month. Its resale value is negligible and it does not wear out through use.

Advertising costs for the silver polish total $3,600 per month. Variable selling costs associated with the silver polish are 5% of sales.

Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.

Required:

1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.)

2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.)

3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.)

4. If the company sells 8,200 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.)

5. If the company sells 11,900 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.)

Answer 1

1. Incremental revenue per jar

Revenue if polish jar is sold = $5.00

One jar contain 1/4th of grit 337.

Revenue if grit 337 is sold = $7.40*1/4 = $1.85

Hence incremental revenue per jar

= $5.00 - $1.85

= $3.15

2. Incremental contribution per jar

Contribution = sales - variable cost

Variable cost of grit 337

= $1.20

Calculation of contribution

Particular	Grit 337	Polish jar
Sales	$1.85	$5.00
Less variable cost of grit 337 ($1.2*1/4)	$0.30	$0.30
Less further process
Direct cost	-	$1.87
Variable overhead ($1.32*25%)	-	$0.33
Variable selling expense ($5*5%)	-	$0.25
Contribution	$1.55	$2.25

Hence incremental contribution = $2.25 - $1.55 = $0.70 per jar

3. Only the supervisor salary and advertising cost is avoidable if we stop manufacturing.

Since the special equipment has no other task to perform and no resale value , it's depreciation will still occur even if we stop manufacturing. Hence there is no need to consider this.

Avoidable fixed cost

= $3400 + $3600

= $7000

Required jar = fixed cost / contribution per jar

= $7000/$2.25

= 3112 jars.

4. If we sell 8200 jars

Financial advantage = no of jars * incremental contribution per jar

= 8200 * $ 0.70

= $5740

5.if we sell 11900 jars

Advantage = 11900 *$0.70

= $8330

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