Question

Problem 12-3 Pronghorn 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 $207,000 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 $258,700. FloorShine sells at $21 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 $104,000. 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.

Answer 1

(1) Total weekly gross profit: $149,900

	Table	FloorShine	Total
	Cleaner
Production in ounces	285000	570000
Revenues $	216600	399000	615600
Costs:
CDG costs	69000	138000	207000
Additional processing costs	0	258700	258700
Total costs	69000	396700	465700
Weekly gross profit $	147600	2300	149900

(2) Total weekly gross profit: $171,300

	Total	FloorShine	Total
	TSR + TP
Production in ounces	570000	570000
Revenues $	342000	399000	741000
Costs:
CDG costs	103500	103500	207000
TCP costs	104000	0	104000
Additional processing costs	0	258700	258700
Total costs	207500	362200	569700
Weekly gross profit $	134500	36800	171300

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

	Don't Process	Process	Net Income
	Table Cleaner	Table Cleaner	Increase
	Further	Further	(Decrease)
Incremental revenue	216600	342000	125400
Incremental costs	0	104000	-104000
Totals $	216600	238000	21400

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.