Question

Answer 1 and 2 for Cantel Company

Cantel Company produces cleaning compounds for both commercial and household customers. Some of these products are produced as part of a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for commercial sale, costs $270 a pound to make and sells for $2.80 per pound. A portion of the annual production of GR37 is retained for further processing in a separate department where it is combined with several other ingredients to form SilPol, which is sold as a silver polish, at $5.00 per unit. The additional processing requires 1/4 pound of GR37 per unit, additional processing costs amount to $3.20 per unit of SilPol produced. Variable selling costs for SilPol average $0.40 per unit. If production of SilPol were discontinued, $6,300 of costs in the processing department would be avoided. Cantel has, at this point, unlimited demand for, but limited capacity to produce, product GR37 Required 1. Calculate the minimum number of units of SilPol that would have to be sold in order to justify further processing of GR37. 2. Assume that the cost data reported for GR37 are obtained at a level of output equal to 5,700 pounds, which is the maximum that the company can produce at this time. What is the expected operating income (loss) under each of the following scenarios: (a) all available capacity is used to produce GR37, but no SilPol; (b) 7,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; (c) 9,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; and (d) 11,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37.

Answer 1

Part 1

Incremental Fixed Costs (SilPol)		6300
Incremental Contribution Margin/Unit Sold:
Selling price per unit		5
Less: Relevant Costs
Opportunity cost: lost revenue from GR37
GR37 selling price/lb.	2.80
Coversion rate	0.25	0.70
Out-of-Pocket Costs
Additional processing/unit	3.20
Variable selling cost/unit	0.40	3.60
Contribution Margin/unit of Silver Polish Sold		0.70

Thus, to justify diversion of GR37 to produce SilPol (thereby incurring additional fixed costs of $6300), it is required to sell at least $6300 ÷$0.70 per unit = 9000units of SilPol.

Part 2

	Units of SilPol Produced/Sold
	0	7000	9000	11000
Sales:
GR37:
Pounds	5700	3950	3450	2950
Selling price per pound	2.80	2.80	2.80	2.80
Revenue from GR37	15960	11060	9660	8260
SilPol:
Units	0	7000	9000	11000
Selling price per unit	5	5	5	5
Revenue from Sale of SilPol	0	35000	45000	55000
Total Sales Revenue	15960	46060	54660	63260
Costs:
GR37 (5,700 lbs. × $2.70/lb.)	15390	15390	15390	15390
Incremental Costs--SilPol:
Avoidable Fixed Costs	0	6300	6300	6300
Variable costs:
Processing costs (@ $3.20/unit)	0	22400	28800	35200
Selling costs (@ $0.40/unit)	0	2800	3600	4400
Total Costs	15390	46890	54090	61290
Operating Income (Total Revenue − Total Costs)	570	-830	570	1970