Problem:
Cintas Company produces a line of cleaning products for both industrial and household use. While most of the company's products are processed independently, a few are related, such as Pearl and Satin Polish.
Pearl is an abrasive cleaner used in industrial application. It costs $1.60 per pound to produce and sells for $2.40 per pound. A small portion of Pearl each year is combined with other ingredients to form Satin Polish. Satin sells for $5.00 per jar.
Each jar of Satin uses 1/4 pound of Pearl. The other costs of ingredients and labor required for further processing are as follows:
Additional ingredients $1.00
Additional direct labor $1.48
Total added cost $2.48
The additional overhead costs required each month for further processing are:
- Variable overhead - 50% of additional labor costs
- Fixed overhead - $3,000 related mainly to depreciation (none of the fixed costs are avoidable)
Advertising costs for Satin total $5,000 per month; variable selling costs related to Satin are 10% of sales.
Because of a recent drop in demand for Satin Polish, the management of Cintas is thinking about stopping production of Satin. The sales manager believes it would be more profitable to just sell Pearl.
What is the additional revenue less the additional processing costs; per jar (contribution margin) from further processing Pearl into Satin?