Question

Zytel Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs $2.20 a pound to make and sells for $3.40 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for $5.00 per jar. This further processing requires 1/4 pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to $2.30 per jar. Variable selling costs are $0.30 per jar. If the decision were made to cease production of the silver polish, $8,900 of Mixing Department fixed costs could be avoided. Zytel has limited production capacity for Grit 337, but unlimited demand for the cleaning powder.

Required:

Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Answer 1

Ans:

Sales revenue for one jar of silver polish		5.00
Sales revenue for 1/4 pound of Grit 337		.85
Incremental revenue from further processing		4.15
Incremental costs of further processing:
Processing costs	2.30
Selling costs	.30	2.6
Incremental contribution margin from further  processing into silver polish (per jar		1.55

Indifference point means the point where both options are equally profitable. But beyond that point we will see the further processing is profitable. This is because of involvement of fixed cost in further processing.

Thus Minimum number of jars needed to produce to justify the further processing  

= avoidable FC / incremental contribution = 8900 / 1.55 = 5741.94 jars=5742 Jars (if rounded off to whole number )

Hope this helped ! Let me know in case of any queries.