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)

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                                                                       wrongright decision by choosing to not process table cleaner further.

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(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		$		$		$

Table cleaner                                                                       shouldshould not be processed further.

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Answer 1

	Weekly gross profit Table cleaner NOT processed further	Weekly gross profit Table cleaner is processed further
Sales revenue:
Floor cleaner	$378,100 (597,000 / 30 = 19,900 x $19)	$378,100
Table cleaner	$250,740[298,500/25*$21]
Table Stain Remover		$179,100[298,500/25 ounce per bottle*$15]
Table Polish		$179,100
Total Revenue	$628,840 [$378,100+250,740]	$736,300 [$378,100+179,100+179,100]
Costs:
CDG Costs	$208,500	$208,500
Floor cleaner additional processing costs	$260,000	$260,000
TCP additional costs		$103,000
Total Costs	$468,500	$571,500 [$208,500+$260,000+$103,000]
Weekly gross profit	$160,340 [$628,840-468,500]	$164,800[$736,300-571,500]

management made the wrong decision

1 ) Weekly gross profit if not further processed = $160,340

2) Weekly gross profit if it is further processed is $164,800

3) as we can see that gross profit in further processed column is higher than in not to further process column.

So management made the wrong decision.

(b)

	Dont process further	process further	Increase(decrease)
Incremental revenue (from above table)	0	$107,460[$736,300-$628,840]	$107,460
Incremental Cost	0	($103,000)	($103,000)
Total	0	$4,460	$4,460

Yes, it should be processed further

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