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, 904,500 ounces of chemical input are processed at a cost of $210,300 into 603,000 ounces of floor cleaner and 301,500 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 $255,500.

FloorShine sells at $22 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 301,500 ounces of another compound (TCP) to the 301,500 ounces of table cleaner. This joint process will yield 301,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. Both table products can be sold for $14 per 25-ounce bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis.

					Process Further
		Table Cleaner				Table Stain Remover (TSR)		Table Polish (TP)		Total
Production in ounces		301,500				301,500		301,500
Revenues		$205,020				$168,840		$168,840		$337,680
Costs:
CDG costs		70,100	*			52,575		52,575		105,150	**
TCP costs		0				50,000		50,000		100,000
Total costs		70,100				102,575		102,575		205,150
Weekly gross profit		$134,920				$66,265		$66,265		$132,530

*If table cleaner is not processed further, it is allocated 1/3 of the $210,300 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,206,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

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 rightwrong decision by choosing to not process table cleaner further.

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

Allocated cost is irrelevant since already incurred
1.Weekly gross profit = 205020 - 0 = $205,020
2.If processed further = 337,680-100,000 = $237,680
Made wrong decision
	Don’t Process	Process	Net Income Increase
Incremental Revenue	205,020	337,680	132,660
Incremental costs	0	100,000	(100,000)
Totals	205,020	237,680	32,660