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, 931,500 ounces of chemical input are processed at a cost of $207,300 into 621,000 ounces of floor cleaner and 310,500 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 $257,400.

FloorShine sells at $20 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 310,500 ounces of another compound (TCP) to the 310,500 ounces of table cleaner. This joint process will yield 310,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $106,000. 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.

	Table Cleaner	Table Stain Remover (TSR)	Table Polish (TP)	Total
Production in ounces	310500	310500	310500
Revenues	260820	186300	186300	372600
Costs:
CDG costs	69100	51825	51825	103650
TCP costs	0	53000	53000	106000
Total costs	69100	104825	104825	209650
Weekly gross profit	191720	81475	81475	162950

*If table cleaner is not processed further, it is allocated 1/3 of the $207,300 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,242,000 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.

B.

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		$		$		$

Answer 1

SOLUTION:

A1. Company’s total weekly gross profit assuming the table cleaner is not processed further.

Particulars	Amount	Amount
Sales:
Floors shine{(621,000 /30)×$20}	$414,000
Table cleaner{(310,500 /25)×$21}	$260,820
Total sales		$674,820
Costs:
CDG costs	$207,300
Additional costs of floor shine	$257,400
Total cost		$464,700
Gross profit (Tolal Sales - Total Cost)		$210,120

A2.  Company’s total weekly gross profit assuming the table cleaner is processed further.

Particulars	Amount	Amount
Sales:
Table stain remover	$186,300
Table polish	$186,300
Floorshine	$414,000
Total sales		$786,600
Costs:
CDG costs	$207,300
Additional processing cost for floor shine	$257,400
TCP costs	$106,000
Total costs Gross profit (Total Sales - Total Costs)		$570,700 $215,900

A3.  Compare the resulting net incomes and comment on management’s decision.

If Table Cleaner is processed further Gross profit will increase.

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

B. Using incremental analysis, determine if the table cleaner should be processed further

	Don’t Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	260820	372600	111780
Incremental costs	0	(106000)	(106000)
Total	260820	266600	5780

As the net income of the company will increase if the table should be processed further thus, the decision of management was wrong.