Question

Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish. Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.20 a pound to make, and it has a selling price of $11.60 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $6.00 per jar. This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct variable costs involved in the processing of a jar of silver polish are: Other ingredients $ 0.55 Direct labor 1.40 Total direct cost $ 1.95 Overhead costs associated with processing the silver polish are: Variable manufacturing overhead cost 25 % of direct labor cost Fixed manufacturing overhead cost (per month): Production supervisor $ 3,100 Depreciation of mixing equipment $ 1,400 The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 14,500 jars of polish per month. Its resale value is negligible and it does not wear out through use. Advertising costs for the silver polish total $1,900 per month. Variable selling costs associated with the silver polish are 5% of sales. Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder. Required: 1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.) 2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.) 3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.) 4. If the company sells 7,200 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.) 5. If the company sells 11,100 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.)

Answer 1

Solution 1:
Revenue per Jar of silver polish	$6.00
Revenue per 1/4th pound of Grit 337 ($11.60/4)	$2.90
Incremental revenue per jar for further processing	$3.10
Solution 2:
Computation of Additional contribution Margin- If Grit 337 sold after further processing
Particulars	Grit 337 per 1/4 Pound	Silver Polish per jar	Net Increase/ (decrease)
Selling price per unit	$2.90	$6.00	$3.10
Variable Costs:
Making cost of Grit 337	$0.30	$0.30	$0.00
Other ingredients	$0.00	$0.55	$0.55
Direct labor	$0.00	$1.40	$1.40
Variable Manufacturing Overhead	$0.00	$0.35	$0.35
Variable Selling Cost	$0.00	$0.30	$0.30
Total variable costs	$0.30	$2.90	$2.60
Contribution margin	$2.60	$3.10	$0.50
Solution 3:
Production supervisor cost	$3,100
Advertising cost for silver polish	$1,900
Total Avoidable Fixed costs	$5,000
/Incremental Contribution Margin per Jar	$0.50
Minimum number of jars of silver polish to be sold	10000
Solution 4:
Number of Jars for sale	7200
*Incremental Contribution Margin per Jar	$0.50
Total incremental contribution margin	$3,600
Less: Avoidable fixed costs	$5,000
Financial advantage (disadvantage) of further processing	-1,400
Solution 5:
Number of Jars for sale	11100
*Incremental Contribution Margin per Jar	$0.50
Total incremental contribution margin	$5,550
Less: Avoidable fixed costs	$5,000
Financial advantage (disadvantage) of further processing	550