Question

Ayayai Industrial Products Inc. 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, 945,000 ounces of chemical input are processed at a cost of $213,000 into 630,000 ounces of floor cleaner and 315,000 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 $244,200. 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 315,000 ounces of another compound (TCP) to the 315,000 ounces of table cleaner. This joint process will yield 315,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $102,000. 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. Process Further Table Cleaner Table Stain Remover (TSR) Table Polish (TP) Total Production in ounces 315,000 315,000 315,000 Revenues $264,600 $189,000 $189,000 $378,000 Costs:    CDG costs 71,000 * 53,250 53,250 106,500 **    TCP costs 0 51,000 51,000 102,000      Total costs 71,000 104,250 104,250 208,500 Weekly gross profit $193,600 $84,750 $84,750 $169,500 *If table cleaner is not processed further, it is allocated 1/3 of the $213,000 of CDG cost, which is equal to 1/3 of the total physical output. **If table cleaner is processed further, total physical output is 1,260,000 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. (If amount decreases net income then enter the amount 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:

1630000 ounces Table Cleanser No of ounces per bottle NO of bottles Selling price per Bottle 315000 ounces 25 12600 30 Floor Shine No of ounces per bottle NO of bottles Selling price per Bottle 21000 2,64,600.00 1 4,20,000.00 Total Sales Value (12600*21) Total Sales Value (21000*20)

1 If Table Cleanser is not processed further Sales Table Cleanser 2,64,600.00 Floor Shine 4,20,000.00 Total Sales Costs CDG Costs 2,13,000.00 Additional processing cost 2,44,200.00 Total Cost 6,84,600.00 4,57,200.00 Gross Profit | 2,27,400.00

2 IF Table Cleanser is processed further Sales Table Stain Remove Table Polis Floor Shine Total Sales 1,89,000.00 1,89,000.00 4,20,000.00 7,98,000.00 W Costs CDG TCP Additional processing cost Total Cost 2,13,000.00 1,02,000.00 2,44,200.00 5,59,200.00 Gross Profit 2,38,800.00

Dont process further 2,64,600.00 . 2,64,600.00 Incremental Revenue Incremental Costs Totals Process further 3,78,000.00 1,02,000.00 2,76,000.00 1,13 Net increase/(Decrease) 1,13,400.00 1,02,000.00 11,400.00 Management should have processes as further as there is a net increase of 11400 profit