Question

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces...

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, 936,000 ounces of chemical input are processed at a cost of $ 209,100into 624,000 ounces of floor cleaner and 312,000 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 $ 249,100.

FloorShine sells at $ 21 per 30-ounce bottle. The table cleaner can be sold for $ 21 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 312,000 ounces of another compound (TCP) to the 312,000 ounces of table cleaner. This joint process will yield 312,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $ 100,000. 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 312,000 312,000 312,000
Revenues $ 262,080 $ 187,200 $ 187,200 $ 374,400
Costs:
   CDG costs 69,700 * 52,275 52,275 104,550 **
   TCP costs 0 50,000 50,000 100,000
     Total costs 69,700 102,275 102,275 204,550
Weekly gross profit $ 192,380 $ 84,925 $ 84,925 $ 169,850


*If table cleaner is not processed further, it is allocated 1/3 of the $ 209,100 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,248,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

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.


(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.


(3) Compare the resulting net incomes and comment on management’s decision.

  wrongright

Homework Answers

Answer #1

(1) Total weekly gross profit: $240,680

Table FloorShine Total
Cleaner
Production in ounces 312000 624000
Revenues $ 262080 436800 698880
Costs:
CDG costs 69700 139400 209100
Additional processing costs 0 249100 249100
Total costs 69700 388500 458200
Weekly gross profit $ 192380 48300 240680

(2) Total weekly gross profit: $253,000

Total FloorShine Total
TSR + TP
Production in ounces 624000 624000
Revenues $ 374400 436800 811200
Costs:
CDG costs 104550 104550 209100
TCP costs 100000 0 100000
Additional processing costs 0 249100 249100
Total costs 204550 353650 558200
Weekly gross profit $ 169850 83150 253000

(3) Management made the wrong decision by choosing to not process table cleaner further.

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