Problem 7-38A Miramichi Industrial Products Co. is a diversified industrial-cleaner processing company. The company's main plant produces two products: a table cleaner and a floor cleaner. They are made from a common set of chemical inputs (called CDG). Each week, the company processes 29,250 litres of chemical input at a cost of $210,000 into 19,500 litres of floor cleaner and 9,750 litres 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 total $241,800.
FloorShine sells at $15 per one-litre bottle. The table cleaner can be sold for $25 per one-litre bottle. However, the table cleaner can be converted into two other products by adding 9,750 litres of another compound (TCP) to the 9,750 litres of table cleaner. This joint process will yield 9,750 litres each of table stain remover and table polish. The additional processing costs for this process are
$124,800. Both table products can be sold for $21 per one-litre bottle.
The company decided not to process the table cleaner into table stain remover and table polish based on the following analysis:
|
Process Further
|
|
Table
Cleaner
|
Table Stain
Remover
|
Table
Polish
|
Total
|
| Production in litres |
(9,750) |
9,750
|
|
9,750
|
|
|
| Revenue |
$243,750
|
|
$204,750
|
|
$204,750
|
|
$409,500
|
|
| Costs: |
|
|
|
|
| CDG costs |
70,000 |
a
|
52,500 |
|
52,500 |
|
105,000 |
b
|
| TCP costs |
0
|
|
62,400
|
|
62,400
|
|
124,800
|
|
| Total costs |
70,000
|
|
114,900
|
|
114,900
|
|
229,800
|
|
| Weekly gross profit |
$173,750
|
|
$89,850
|
|
$89,850
|
|
$179,700
|
|
a If the table cleaner is not processed further, it is allocated one third of the $210,000 of CDG cost, which is equal to one third of the total physical output.
b If the table cleaner is processed further, the total physical output is 39,000 litres. Table stain remover and table polish combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Do the following to determine whether management made the correct decision by not processing the table cleaner further.
(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.
(3) Compare the resulting net incomes and comment on management's decision.
Management made the rightwrong decision by choosing to not process table cleaner further.
Using incremental analysis, determine if the table cleaner should be processed further. (If an amount reduces the net income then enter with a negative sign preceding the number, e.g.-15,000 or parenthesis, e.g. (15,000).)