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, 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

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.