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, 846,000 ounces of chemical input are processed at a cost of $212,700 into 564,000 ounces of floor cleaner and 282,000 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 $259,300.

FloorShine sells at $19 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 282,000 ounces of another compound (TCP) to the 282,000 ounces of table cleaner. This joint process will yield 282,000 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 $16 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		282,000				282,000		282,000
Revenues		$225,600				$180,480		$180,480		$360,960
Costs:
CDG costs		70,900	*			53,175		53,175		106,350	**
TCP costs		0				50,500		50,500		101,000
Total costs		70,900				103,675		103,675		207,350
Weekly gross profit		$154,700				$76,805		$76,805		$153,610

*If table cleaner is not processed further, it is allocated 1/3 of the $212,700 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,128,000 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

$110,800

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

Total weekly gross profit

$ 145,160

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

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

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Attempts: 1 of 7 used

(b)

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		$		$		$

Table cleaner                                                                       should/ should not be processed further.

Answer 1

Question a:

Requirement 1: Compute total weekly gross profit assuming table cleaner is not processed further as follows

Sales revenue	Amount	Amount
Floorshine               ((564,000 ounces ÷ 30 ounce) × $19)	$357,200
Table cleaner          ((282,000 ounces ÷ 25 ounce) × $20)	$225,600
Total sales revenue		$582,800
Cost of production
Chemical input CDG	$212,700
Additional processing cost of Floorshine	$259,300
Total cost of production		$472,000
Gross profit		$110,800

Requirement 2: Compute total weekly gross profit assuming table cleaner is processed further as follows

Sales revenue	Amount	Amount
Floorshine               ((564,000 ounces ÷ 30 ounce) × $19)	$357,200
Table stain remover ((282,000 ounces ÷ 25 ounce) × $16)	$180,480
Table polish             ((282,000 ounces ÷ 25 ounce) × $16)	$180,480
Total sales revenue		$718,160
Cost of production
Chemical input CDG	$212,700
Additional processing cost of Floorshine	$259,300
Cost of TCP compound	$101,000
Total cost of production		$573,000
Gross profit		$145,160

Requirement 3: The net income of the company would have increased by $34,360 had the management decided to process further table cleaner and therefore it is a wrong decision.      

Question b:

Particulars	Don't Process Further	Prcoess Further	Net Income Increase / (Decrease)
Incremental revenues	$225,600	$360,960	$135,360
Incremental costs	$0	($101,000)	($101,000)
Total	$225,600	$259,960	$34,360

Note: $360,960 ($180,480 + $180,480)

The table cleaner should be processed further as the incremental benefit is $34,360.