Question

Determine if sold or proces (LO 4). AN Show computations. (d) - - What nonfinancial factors should management consider in making its decision? P12-3 Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner pro cessing 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, 900,000 ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 ounces of table cleaner. The floor cleaner has no market value until it is con- verted into a polish with the trade name Floor Shine. The additional processing costs for this conversion amount to $240,000. Floor Shine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces of table cleaner. This joint process will yield 300,000 ounces cach of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $100,000. 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. XLS Process Further Table Stain Remover (TSR) 300,000 $168,000 Table Cleaner 300.000 $204,000 Total Table Polish (TP) 300,000 $168,000 $336,000 Production in ounces Revenues Costs CDG costs TCP costs Total costs Weekly gross profit 70,000 70.000 $134.000 52 500 50,000 102,500 $ 65,500 52,500 50.000 102,500 $ 65.500 105.000** 100,000 205,000 $131,000 *If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the total physical output ** table cleaner is processed further, total physical output is 1.200.000 ounces. TSR and TP com- bined account for 50% of the total physical output and are each allocated 25% of the CDG cost Copyright 2017 John Wiley & Sons, Inc. 524 12 incremental Analysis (2) Gross profit S180.000 Instructions (a) 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 (3) Compare the resulting net incomes and comment on management decision (b) Using incremental analysis, determine if the table cleaner should be processed further (CMA adapted)

Answer 1

Thompson Industrial Products Profit when table cleaner is not processed further No. of Bottles Price per Bottle Total 20000 No of bottles - Floor cleaner Price per bootle - Floor cleaner Total revenue -Floor cleaner 20 400000 12000 17 204000 604000 No of bottles - Table cleaner Price per bootle - Table cleaner Total revenue - Table cleaner Total Revenue Less: Cost of production Additional Processing cost Gross Profit 450000 154000 600000 / 30 = 20000 300000 / 25 = 12000 70000 x 2 +52500 x 2 +52500 x 2 + 100000 = 450000 No of bottles - Floor cleaner Price per bootle - Floor cleaner Total revenue -Floor cleaner Profit when table cleaner is processed further No. of Bottles Price per Bottle Total 20000 20 400000 12000 No of bottles - Table Stain remover Price per bootle - Table Stain remover Total revenue - Table Stain remover 168000 12000 14 168000 736000 No of bottles - Table polish Price per bootle - Table polish Total revenue - Table polish Total Revenue Less: Cost of production Additional Processing cost Additonal cost for further processing Gross Profit 450000 100000 186000

Incremental earnngs as a result of further processing: Profit when table cleaner is processed further Profit when table cleaner is not processed further 186000 154000 32000 Decision Processing results into a $16,000 increase in net income, hence the decision by management not to process further is not a wise decision. Incremental Analysis Particulars Incremental Revenue Incremental cost Net Income Table Cleaner Table Cleaner not processed is processed Net Income further further Increase/Decrease 204000 336000 132000 -100000 -100000 204000 236000 32000 Using Incremental analysis, the table cleaner should be processed further