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 $2.80 a pound to make and sells for $4.00 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 $5.60 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 $2.20 per jar. Variable selling costs are $0.50 per jar. If the decision were made to cease production of the silver polish, $8,500 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

Sales revenue for one jar of silver polish = $5.60
Sales revenue for 1/4 pound of Grit 337 (1/4 × 4.00)= $1.00

Further processing - Incremental revenue= $5.60 - $1.00 = $4.60

Processing costs = $2.20
Selling Cost = $0.50

Further processing - Incremental costs = $2.20 + $0.50 = $2.70

Incremental contribution margin = $4.60 - $2.70 = $1.90

Indifference point in units = 8,500 / 1.90 = 4474

When more than 4,474 jars of silver polish can be sold, Zytel Corporation must process the requisite amount for further into the polish of Grit 33.