Reference no: EM131126664

Ohio Household Products Co. (OHPC) is a diversified household-cleaner processing company. The company's Mishawaka plant produces two products: an appliance cleaner and a general-purpose cleaner from a common set of chemical inputs (NPR). Each week 1,000,000 ounces of chemical input are processed at a cost of $200,000 into 750,000 ounces of appliance cleaner and 250,000 ounces of general-purpose cleaner. The appliance cleaner has no market value until it is converted into a polish with the trade name Shine Brite. The additional processing costs for this conversion amount to $300,000. Shine Brite sells at $15 per 25-ounce bottle. The general-purpose cleaner can be sold for $20 hper 20-ounce bottle. However, the general-purpose cleaner can be converted into two other products by adding 250,000 ounces of another compound (PST) to the 250,000 ounces of general-purpose cleaner. This joint process will yield 250,000 ounces each of premium cleaner (PC) and premium stain remover (PSR). The additional process- ing costs for this process amount to $140,000. Both premium products can be sold for $16 per 20-ounce bottle.

The company decided not to process the general-purpose cleaner into PC and PSR based on the following analysis.

				Process Further
	General-Purpose Cleaner	PremiumCleaner (PC)		Premium StainRemover (PSR)	Total
Production in ounces	250,000	250,000		250,000
Revenue	$250,000	$200,000		$200,000	$400,000
Costs: NPR costs	50,000*	40,000		40,000	80,000**
PST costs	0	70,000		70,000	140,000
Total costs	50,000	110,000		110,000	220,000
Weekly gross profit	$200,000	$ 90,000		$ 90,000	$180,000

*If general-purpose cleaner is not processed further, it is allocated 1/4 of the $200,000 of NPR cost, which is equal to 1/4 of the total physical output.

**If general-purpose cleaner is processed further, total physical output is 1,250,000 ounces. PC and PSR combined account for 40% of the total output and are each allocated 20% of the NPR cost.

Instructions

(a) Determine if management made the correct decision to not process the general-purpose cleaner further by doing the following.

(1) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is not processed further.

(2) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is processed further.

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

(b) Using incremental analysis, determine if the general-purpose cleaner should be pro- cessed further.