Question

Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While moThe production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is specia

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Answer #1
1 Incremental revenue $           3.15 per jar
2 Incremental contribution margin $           0.60 per jar
3 Number of jars that must be sold 10000 per month
4 Financial advantage (disadvantage) $       -1,380
5 Financial advantage (disadvantage) $            540

Working:

1 Incremental revenue per jar:
Selling price of silver polish (per jar) $            5.00
Selling price of Grit 337 (1/4 pound) ($7.40 x 1/4) $            1.85
Incremental revenue per jar $            3.15
2 Incremental variable costs per jar:
Other ingredients $            0.55
Direct labor $            1.40
Variable manufacturing overhead cost ($1.40 x 25%) $            0.35
Variable selling costs (5% x $5) $            0.25
Incremental variable costs per jar $            2.55
Incremental contribution margin per jar ($3.15 - $2.55) $            0.60

Note: The cost of $1.60 per pound required to make Grit 337 is irrelevant since the same is incurred irrespective of whether Grit 337 is sold as a cleaning powder or is processed further into silver polish.

3. If the processing of Grit 337 into silver polish is discontinued, the production supervisor's salary of $3400 and advertising expense of $2600 would be avoided. Thus, the total avoidable fixed costs would be $3400 + $2600 = $6000.

Number of jars required to be sold each month to justify further processing of Grit 337 into silver polish = Total avoidable fixed costs/Incremental contribution margin = $6000/$0.60 = 10000 jars per month.

4 Number of jars of silver polish sold 7700
Total incremental contribution (7700 x $0.60) $   4,620.00
Less: Avoidable fixed costs $   6,000.00
Financial advantage (disadvantage) $ $ -1,380.00
5 Number of jars of silver polish sold 10900
Total incremental contribution (10900 x $0.60) $   6,540.00
Less: Avoidable fixed costs $   6,000.00
Financial advantage (disadvantage) $ $       540.00
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