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, 927,000 ounces of chemical input are processed at a cost of $212,100 into 618,000 ounces of floor cleaner and 309,000 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 $245,000.

FloorShine sells at $18 per 30-ounce bottle. The table cleaner can be sold for $18 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 309,000 ounces of another compound (TCP) to the 309,000 ounces of table cleaner. This joint process will yield 309,000 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 $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		309,000				309,000		309,000
Revenues		$222,480				$173,040		$173,040		$346,080
Costs:
CDG costs		70,700	*			53,025		53,025		106,050	**
TCP costs		0				54,500		54,500		109,000
Total costs		70,700				107,525		107,525		215,050
Weekly gross profit		$151,780				$65,515		$65,515		$131,030

*If table cleaner is not processed further, it is allocated 1/3 of the $212,100 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,236,000 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.

(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed 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 eg. (45).) Don't Process Table Cleaner Further Process Table Cleaner Further Net Income Increase (Decrease) Incremental revenue $ Incremental costs Totals

Answer 1

Part a 1

Sales:
Floorshine (618000/30*18)	370800
Table cleaner (309000/25*18)	222480
Total sales		593280
Costs:
CDG costs	212100
Additional processing costs for floor shine	245000
Total cost		457100
Gross profit		$136180

Part a 2

Sales:
Table stain remover (309000/25*14)	173040
Table polish (309000/25*14)	173040
Floorshine	370800
Total sales		716880
Costs:
CDG costs	212100
Additional processing costs for floor shine	245000
TCP costs	109000
Total cost		566100
Gross profit		$150780

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 $14600 (150780-136180)

Part B

	Don’t Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	222480	346080	123600
Incremental costs	0	109000	109000
Totals	$222480	$237080	$14600

173040+173040 =$346080