Question

Problem 20-03A 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, 918,000 ounces of chemical input are processed at a cost of $208,200 into 612,000 ounces of floor cleaner and 306,000 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 $251,500. FloorShine sells at $21 per 30-ounce bottle. The table cleaner can be sold for $19 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 306,000 ounces of another compound (TCP) to the 306,000 ounces of table cleaner. This joint process will yield 306,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $109,000. 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 Stain Table Remover Table (TSR) 306,000 Polish (TP) Total Cleaner Production in ounces 306,000 306,000 Revenues $367,200 $232,560 $183,600 $183,600 Costs: 104.100 * CDG costs 69,400 52,050 52,050 TCP costs 54,500 54,500 109,000 Total costs 69,400 213,100 106,550 106,550 $77,050 $163,160 Weekly gross profit $77,050 $154,100 *Ir table deaner is not processed further, it is allocated 1/3 of the $208,200 of CDG cost, which is equal to 1/3 of the total physical output. **Ir table cleaner is processed further, total physical output is 1,224,000 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 24 (3) Compare the resulting net incomes and comment on management's decision. Management made the decision by choosing to not process table cleaner further. LINK TO TEXT LINK TO VIDEO 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 Process Table Cleaner Net Income Table Cleaner Increase Further Further (Decrease) Incremental revenue Incremental costs Totals

Answer 1

Part a 1

Sales:
Floorshine (612000/30*21)	428400
Table cleaner (306000/25*19)	232560
Total sales		660960
Costs:
CDG costs	208200
Additional processing costs for floor shine	251500
Total cost		459700
Gross profit		$201260

Part a 2

Sales:
Table stain remover (306000/25*15)	183600
Table polish (306000/25*15)	183600
Floorshine	428400
Total sales		795600
Costs:
CDG costs	208200
Additional processing costs for floor shine	251500
TCP costs	109000
Total cost		568700
Gross profit		$226900

Part a 3

Management made the wrong decision by choosing to not process table cleaner further.

Management should have decided to process the table cleaner further. With the additional cost of $109000, there would have been additional profit of $25640 (226900-201260)

Part B

	Don’t Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	232560	367200	134640
Incremental costs	0	109000	109000
Totals	$232560	$459200	$25640