Question

Monty Industrial Products Inc. 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, 855,000 ounces of chemical input are processed at a cost of $207,600 into 570,000 ounces of floor cleaner and 285,000 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 $257,800. FloorShine sells at $20 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 285,000 ounces of another compound (TCP) to the 285,000 ounces of table cleaner. This joint process will yield 285,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $103,000. 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 Remover Table (TSR) Polish (TP) 285,000 285,000 $171,000 $171,000 Table Cleaner 285,000 $216,600 Total $342,000 Production in ounces Revenues Costs: CDG costs TCP costs Total costs Weekly gross profit 69,200 * 51,900 51,500 103,400 $67,600 51,900 51,500 103,400 $67,600 103,800 ** 103,000 206,800 $135,200 69,200 $147,400

*If table cleaner is not processed further, it is allocated 1/3 of the $207,600 of CDG cost, which is equal to 1/3 of the total physical output.

**If table cleaner is processed further, total physical output is 1,140,000 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 $______________

(3) Compare the resulting net incomes and comment on management’s decision.

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

Using incremental analysis, determine if the table cleaner should be processed further. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Part a 1

Sales:
Floorshine (570000/30*20)	380000
Table cleaner (285000/25*19)	216600
Total sales		596600
Costs:
CDG costs	207600
Additional processing costs for floor shine	257800
Total cost		465400
Gross profit		$131200

Part a 2

Sales:
Table stain remover (285000/25*15)	171000
Table polish (285000/25*15)	171000
Floorshine (570000/30*20)	380000
Total sales		722000
Costs:
CDG costs	207600
Additional processing costs for floor shine	257800
TCP costs	103000
Total cost		568400
Gross profit		$153600

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 $103000, there would have been additional profit of $22400 (153600-131200)

Part B

	Don’t Process Table Cleaner Further	Process Table Cleaner Further	Net Income Increase (Decrease)
Incremental revenue	216600	342000	125400
Incremental costs	0	103000	103000
Totals	$232560	$459200	$22400