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 $209,100 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 $ 258,100.

FloorShine sells at $ 19 per 30-ounce bottle. The table cleaner can be sold for $ 19 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 282,000ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $ 110,000. 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 282,000 / 282,000 / 282,000 / --

Revenues $ 214,320 / $ 169,200 / $ 169,200 / $ 338,400

Costs:   CDG costs 69,700* / 52,275 / 52,275 / 104,550**   

TCP costs 0 / 55,000 / 55,000 / 110,000     

Total costs 69,700 / 107,275 / 107,275 / 214,550

Weekly gross profit $ 144,620 / $ 61,925 / $ 61,925 / $ 123,850

*If table cleaner is not processed further, it is allocated 1/3 of the $ 209,100 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.

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 wrong/right  decision by choosing to not process table cleaner further.

Answer 1

1	The company's total weekly gross profit assuming table cleaner is not processed further
		Floor Cleaner	Table Cleaner	Total
	Ounce	564000	282000	846000
	Selling price	$19 per 30 ounce bottle	$19 per 25 ounce bottle
	Sales Revenue	357200	214320	571520
	Less: Cost of goods sold	139400	69700	209100
	Additional processing cost	$258,100		258100
	Total cost	$397,500	$69,700	467200
	Gross profit	($40,300)	$144,620	104320
2	The company's total weekly gross profit assuming table cleaner is processed further
		Floor Cleaner	Table Stain Remover	Table Polish	Total
	Ounce	564000	282000	282000	1128000
	Selling price	$19 per 30 ounce bottle	$15 per 25 ounce bottle	$15 per 25 ounce bottle
	Sales Revenue	357200	169200	169200	695600
	Less: Cost of goods sold	139400	34850	34850	209100
	Additional processing cost	$258,100	55000	55000	368100
	Total cost	$397,500	$89,850	$89,850	577200
	Gross profit	($40,300)	$79,350	$79,350	118400
3	Net income is higher in further processing table cleaner as seen above.
	Management made the wrong decision by choosing not to process table cleaner further