Question

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week, 877,500ounces of chemical input are processed at a cost of $212,400 into 585,000 ounces of floor cleaner and 292,500 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $250,300.

FloorShine sells at $22 per 30-ounce bottle. The table cleaner can be sold for $20 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 292,500 ounces of another compound (TCP) to the 292,500 ounces of table cleaner. This joint process will yield 292,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $101,000. Both table products can be sold for $15 per 25-ounce bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis.

					Process Further
		Table Cleaner				Table Stain Remover (TSR)		Table Polish (TP)		Total
Production in ounces		292,500				292,500		292,500
Revenues		$234,000				$175,500		$175,500		$351,000
Costs:
CDG costs		70,800	*			53,100		53,100		106,200	**
TCP costs		0				50,500		50,500		101,000
Total costs		70,800				103,600		103,600		207,200
Weekly gross profit		$163,200				$71,900		$71,900		$143,800

*If table cleaner is not processed further, it is allocated 1/3 of the $212,400 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,170,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

(a)

Correct answer iconYour answer is correct.

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(1) Calculate the company’s total weekly gross profit assuming the table cleaner is not processed further.

Total weekly gross profit

$

(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.

Total weekly gross profit

$

(3) Compare the resulting net incomes and comment on management’s decision.

Management made the                                                                       rightwrong decision by choosing to not process table cleaner further.

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Attempts: 4 of 7 used

(b)

Partially correct answer iconYour answer is partially correct.

Using incremental analysis, determine if the table cleaner should be processed further. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Don’t Process Table Cleaner Further		Process Table Cleaner Further		Net Income Increase (Decrease)
Incremental revenue		$		$		$
Incremental costs
Totals		$		$		$

.

Answer 1

(a) 1. Calculation of company’s total weekly gross profit when table cleaner is not processed further:

	Amount ($)
1.Sales:
Floorshine({585,000/30}*22)	$429,000
Table cleaner(292,500/25*20)	$234,000
Total sales-	$663,000
2.Costs:
CDG Costs	$212,400
Additional Processing costs of Floorshine	$250,300
Total Cost:	$462,700
Gross Profit- (Sales-Cost)	$200,300

2.Calculation of total weekly gross profit when table cleaner is processed further:

	Amount ($)
1.Sales:
Floorshine({585,000/30}*22)	$429,000
Table Stain Remover(292,500/25*15)	$175,500
Table Polish(292,500/25*15)	$175,500
Total sales-	$780,000
2.Costs:
CDG Costs	$212,400
Additional Processing costs of Floorshine	$250,300
TCP Costs	$101,000
Total Cost:	$563,700
Gross Profit- (Sales-Cost)	$216,300

3. Management took wrong Decision by chhosing not to process further with Table cleaner.As they are losing additional profit=-$216,300-$200,300= $16000.

(B)

	Don’t Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	$234,000	$351,000	$117,000
Incremental costs	0	$101,000	($101,000)
Totals	$234,000	$250,000	$16,000

Hence, Table cleaner should be processed further as there is a Increase in Net Income of $16,000.