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, 895,500 ounces of chemical input are processed at a cost of $208,500 into 597,000 ounces of floor cleaner and 298,500 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 $260,000.

FloorShine sells at $19 per 30-ounce bottle. The table cleaner can be sold for $21 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 298,500 ounces of another compound (TCP) to the 298,500 ounces of table cleaner. This joint process will yield 298,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $103,000. 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		298,500				298,500		298,500
Revenues		$250,740				$179,100		$179,100		$358,200
Costs:
CDG costs		69,500	*			52,125		52,125		104,250	**
TCP costs		0				51,500		51,500		103,000
Total costs		69,500				103,625		103,625		207,250
Weekly gross profit		$181,240				$75,475		$75,475		$150,950

*If table cleaner is not processed further, it is allocated 1/3 of the $208,500 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,194,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

(a)

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                                                                       wrongright decision by choosing to not process table cleaner further.

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Answer 1

1.

If not processed further
Particulars	Amount	Amount
Sales:
Floors shine (597,000 /30)×$19	378,100
Table cleaner (298,500 /25)×$21	250,740
Total sales		628,840
Costs:
CDG costs	208,500
Additional costs of floor shine	260,000
Total cost		468,500
Gross profit		160,340

2.

If processed further
Particulars	Amount	Amount
Sales:
Floors shine (597,000 /30)×$19	378,100
Table stain remover (298,500 /25)×$15	179,100
Table polish (298,500 /25)×$15	179,100
Total sales		736,300
Costs:
CDG costs	208,500
Additional costs of floor shine	260,000
TCP costs	103,000
Total cost		571,500
Gross profit		164,800

3.

	If not processed further	If processed further	Net increase/(decrease) in income
Incremental revenue	250,740	358,200	107,460
Incremental costs	0	-103,000	-103,000
Total	250,740	255,200	4,460

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