Question

Thompson Industrial Products Inc. (TIPI) 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, 922,500 ounces of chemical input are processed at a cost of $212,700 into 615,000 ounces of floor cleaner and 307,500 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 $242,000.

FloorShine sells at $18 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 307,500 ounces of another compound (TCP) to the 307,500 ounces of table cleaner. This joint process will yield 307,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $102,000. 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 Cleaner				Table Stain Remover (TSR)		Table Polish (TP)		Total
Production in ounces		307,500				307,500		307,500
Revenues		$233,700				$184,500		$184,500		$369,000
Costs:
CDG costs		70,900	*			53,175		53,175		106,350	**
TCP costs		0				51,000		51,000		102,000
Total costs		70,900				104,175		104,175		208,350
Weekly gross profit		$162,800				$80,325		$80,325		$160,650

*If table cleaner is not processed further, it is allocated 1/3 of the $212,700 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,230,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

(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.

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                                                                       wrongright decision by choosing to not process table cleaner further.

Answer 1

ANSWER

Part al: Ounces Yield / ounces per bottle No of bottles Price per bottle Total revenue Floor cleaner Table cleaner 615000 30 20500 18 369000 Total 307500 25 12300 19 233700602700 Less : Cost of production Additional Processing cost Gross Profit 212700 242000 148000 Part a2: Floor cleaner Table Stain remover Table Polish Total 615000 307500307500 30 25 20500 123001 12300 15 Ounces Yield / ounces per bottle No of bottles Price per bottle TOTAL REVENUE Less : Cost of production Additional Processing cost=242000+102000 Gross Profit 369000 184500 184500738000 212700 344000 181300 Part a3: Management made wrong decision by choosing to not process table cleaner further. (as Gross profit under further processing is more) Part b: Don't process Net income Table cleaner Process Table cleaner Increase futher futher (Decrease) 233700 369000 135300 - 102000 -102000 233700 267000 33300 Incremental revenue Incremental cost Totals

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