Reference no: EM132462969
Problem - 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, 846,000 ounces of chemical input are processed at a cost of $209,100 into 564,000 ounces of floor cleaner and 282,000 ounces of table cleaner. The floor cleaner had no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $258,100.
FloorShine sells at $19 per 30-ounce bottle. The table cleaner can be sold for $19 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 282,000 ounces of another compound (TCP) to the 282,000 ounces of table cleaner. This joint process will yield 282,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $110,000. 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.
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Table Cleaner
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Process Further
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Table Stain Remover (TSR)
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Table Polish (TP)
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Total
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Production in ounces
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282,000
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282,000
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282,000
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Revenues
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$214,320
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$169,200
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$169,200
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$338,400
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Costs:
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CDG costs
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69,700*
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52,275
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52,275
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104,550**
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TCP costs
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0
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55,000
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55,000
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110,000
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Total costs
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69,700
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107,275
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107,275
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214,550
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Weekly gross profit
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$144,620
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$61,925
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$61,925
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$123,850
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* 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 1,128,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Required - 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.
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