Question

d

Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish.

Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.20 a pound to make, and it has a selling price of $7.40 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $5.00 per jar.

This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct costs involved in the processing of a jar of silver polish are:

Other ingredients	$	0.50
Direct labor		1.36
Total direct cost	$	1.86

Overhead costs associated with processing the silver polish are:

Variable manufacturing overhead cost		25%	of direct labor cost
Fixed manufacturing overhead cost (per month):
Production supervisor	$	3,500
Depreciation of mixing equipment	$	1,500

The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. Its resale value is negligible and it does not wear out through use.

Direct labor is a variable cost at Come-Clean Corporation.

Advertising costs for the silver polish total $3,500 per month. Variable selling costs associated with the silver polish are 5% of sales.

Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.

Required:
1.	What is the incremental contribution margin per jar from further processing of Grit 337 into silver polish?(Do not round intermediate calculations. Round your answer to 2 decimal places.)

        

2.	What is the minimum number of jars of silver polish that must be sold each month to justify the continued processing of Grit 337 into silver polish? (Round your intermediate calculations to 2 decimal places.)

      

rev: 09_20_2014_QC_54435

References

eBook & Resources

WorksheetDifficulty: 3 HardLearning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further.

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Answer 1

Concepts and reason

Sell or Process furthur decisions:

In sell or process firthur decision is to be taken whether to sell the product at split-off point or sell the product after processing. The product is sold after processing if the incremental revenue after processing is more than incremental processing costs.

Joint processing costs have no influence on the sell or process furthur decisions as they reprsent the costs which have already been incurred. So, joints cost are not relevant in sell or process furthur decisions.

Fundamentals

The sell or process furthur decision is the decision which is to be taken in the context of a joint prroduction process. In this decision to be taken whether to sell the product at split-off point or sell the product after processing.

The product is sold after processing if the incremental revenue after processing is more than incremental processing costs. Joint processing costs have no influence on the sell or process furthur decisions as they reprsent the costs which have already been incurred. So, joints cost are not relevant in sell or process furthur decisions.

Avoidable costs are the costs which would be incurred when offer is to be accepted. So, it is relevant cost.

Calculate the incremental contribution margin per jar for further processing of G337 into silver polish.

Following schedule shows the incremental contribution margin per jar for further processing of G337 into silver polish:

The incremental contribution margin per jar is $0.70.

Following schedule shows the calculation:

Calculate the minimum number of jars that must be sold each month to justify the continued processing of G337 into silver polish.

Following schedule shows the minimum number of jars:

The minimum number of jars that must be sold is 10,000 jars.

Following shows the calculation:

Ans: Part 1

Part 2