Question

Juarez 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 $1.80 a pound to make and sells for $3.00 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 $4.60 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 $2.30 per jar. Variable selling costs are $0.50 per jar. If the decision were made to cease production of the silver polish, $8,100 of Mixing Department fixed costs could be avoided. Juarez has limited production capacity for Grit 337, but unlimited demand for the cleaning powder.

Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337.

Answer 1

Profit per Unit of Grit 337 = $3.00 - $1.80 = $1.20

Polish:

Selling Price per Jar	$4.60
Costs:
Grit 337 ¼*3	0.75
Other variable Costs per jar	2.30
Variable Selling Cost	0.50
Contribution per Jar	$1.05

Avoidable Fixed Cost = $8,100

Minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337 = Avoidable Fixed Costs/Contribution Margin per Jar

= 8,100/1.05 = 7,714.28 or 7,715 Jars

Since there is unlimited demand of grit 337 at the rate of $3, cost will be taken at $3 per unit