Question

Zytel Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs $2.60 a pound to make and sells for $3.80 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for $5.30 per jar. This further processing requires 1/4 pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to $2.20 per jar. Variable selling costs are $0.30 per jar. If the decision were made to cease production of the silver polish, $8,800 of Mixing Department fixed costs could be avoided. Zytel has limited production capacity for Grit 337, but unlimited demand for the cleaning powder. Required: Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Answer 1

As per the problem,In case of two or more projects,there is a need to choose one of them.The criteria upon which is selected is the cost associated with them.There are basically two types of cost i.e. relevant cost and irrelevant cost.The decision is standing upon the relevant cost.The project which generate higher projict will be selected.The cost is the core element.Let us solve the problem:

Calculaion of the minimum number of jars of silver polish that would have to be sold to justify further processing of GRIT 337:

Selling price per unit of Grit377 per 1/4pound =3.80/4=0.95

Selling price per unit of Silver polish per jar = 5.30

NET=5.30-.95=$4.35

Calculation of variable cost:

Particulars	Grit 377 per1/4 pound	Silver polish per jar	Net
(1)Cost of grit 337	2.60/4=0.65	0.65	0
(2)Other ingredient,labour and overhead	0	2.20	2.20
(3)Variable selling cost	0	0.30	0.30
(4)Total (1+2+3)	0.65	3.15	2.5

Contribution per margin;

Grit=Selling price-variable cost=0.95-0.65=$0.30

Silver polish=Selling price-variable cost=5.30-3.15=$2.15

Incremental contribution margin per jar=4.35-2.5=$1.85

Minimum number of jars=Avoidable fixed cost/Incremental contribution margin per jar

=8800/1.85=4756JARS