Question

Cantel Company produces cleaning compounds for both commercial and household customers. Some of these products are produced as part of a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for commercial sale, costs $1.90 a pound to make and sells for $2.00 per pound. A portion of the annual production of GR37 is retained for further processing in a separate department where it is combined with several other ingredients to form SilPol, which is sold as a silver polish, at $6.00 per unit. The additional processing requires 1/5 pound of GR37 per unit; additional processing costs amount to $4.30 per unit of SilPol produced. Variable selling costs for SilPol average $0.50 per unit. If production of SilPol were discontinued, $6,400 of costs in the processing department would be avoided. Cantel has, at this point, unlimited demand for, but limited capacity to produce, product GR37.

Answer 1

Compute operating income or loss as follows

Particulars	Units of Silver Polish Produced and Sold
Units	0	6,000	8,000	10,000
Sales Revenue:
Product GR37:
Pounds	6,800	5,600	5,200	4,800
Selling price per pound GR37	$2.00	$2.00	$2.00	$2.00
Sales revenue from GR37 (a)	$13,600	$11,200	$10,400	$9,600
Product Silver Polish
Units	0	6,000	8,000	10,000
Selling price per unit of Silver Polish	$6.00	$6.00	$6.00	$6.00
Sales revenue from Silver Polish (b)	$0	$36,000	$48,000	$60,000
Total Sales Revenue (a) + (b)	$13,600	$47,200	$58,400	$69,600
Costs:
GR37 (6,800 lbs × $1.90 per lb)	$12,920	$12,920	$12,920	$12,920
Incremental costs-Silver Polish
Avoidable fixed costs	$0	$6,400	$6,400	$6,400
Variable costs:
Processing costs @ $4.30 per unit	$0	$25,800	$34,400	$43,000
Selling costs @ $0.50 per unit	$0	$3,000	$4,000	$5,000
Total costs	$12,920	$48,120	$57,720	$67,320
Operating income / (Loss) (Total sales revenue − Total costs)	$680	($920)	$680	$2,280

Notes:

Compute total GR37 available for sale as follows

Total pounds of GR37 available (c)	6,800	6,800	6,800	6,800
Deduct:
Number of units of silver polish to be produced	0	6,000	8,000	10,000
×   Conversion rate (1/5)	20%	20%	20%	20%
Pounds of GR37 required for producing silver polish (d)	0	1,200	1,600	2,000
Total pounds of GR37 available for sales (c) − (d)	6,800	5,600	5,200	4,800

Compute total processing costs of Silver Polish as follows

Units of Silver Polish to be produced	0	6,000	8,000	10,000
× Processing costs @ $4.30 per unit	$4.30	$4.30	$4.30	$4.30
Total processing costs	$0	$25,800	$34,400	$43,000

Compute variable selling costs as follows

Number of units of silver polish to be produced	0	6,000	8,000	10,000
× Variable selling cost @ $0.50 per unit	$0.50	$0.50	$0.50	$0.50
Total variable selling costs	$0	$3,000	$4,000	$5,000