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, 940,500 ounces of chemical input are processed at a cost of $210,300 into 627,000 ounces of floor cleaner and 313,500 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 $254,800.

FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $20 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 313,500 ounces of another compound (TCP) to the 313,500 ounces of table cleaner. This joint process will yield 313,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $106,000. 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		313,500				313,500		313,500
Revenues		$250,800				$188,100		$188,100		$376,200
Costs:
CDG costs		70,100	*			52,575		52,575		105,150	**
TCP costs		0				53,000		53,000		106,000
Total costs		70,100				105,575		105,575		211,150
Weekly gross profit		$180,700				$82,525		$82,525		$165,050

*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 1,254,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

(a)

Correct answer iconYour answer is correct.

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.

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Attempts: 1 of 5 used

(b)

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

(a)(1)	Table Cleaner Not Processed Further
	Sales:
	FloorShine (627000/30 x $20)	418000
	Table cleaner (313500/25 x $20)	250800
	Total revenue		668800
	Costs:
	CDG	210300
	Additional costs of FloorShine	254800
	Total costs		465100
	Total weekly gross profit $		203700
(a)(2)	Table Cleaner Processed Further
	Sales:
	FloorShine (627000/30 x $20)	418000
	Table Stain Remover (313500/25 x $15)	188100
	Table Polish (313500/25 x $15)	188100
	Total revenue		794200
	Costs:
	CDG	210300
	Additional costs of FloorShine	254800
	TCP	106000
	Total costs		571100
	Total weekly gross profit $		223100

(a)(3) Management made the wrong decision by choosing to not process the table cleaner further.

(b)

	Don't Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	250800	376200	125400
Incremental costs	0	-106000	-106000
Totals	250800	270200	19400

In deciding whether or not to process the table cleaner further, only the relevant costs which are future costs should be considered. The costs that are incurred for the creation of the table cleaner such as the CDG cost are sunk costs and hence irrelevant.

Table cleaner should be processed further.