Reference no: EM131128685
PROBLEM 12-30 Sell or Process Further [LO2]
Clean and Shine Corporation produces several types of industrial and household cleaning compounds and solutions. While most of its products are processed independently, a few are related, such as the company's Clean 236 and its Sparkle silver polish.
Clean 236 is a coarse cleaning powder with many industrial uses. It costs $3.20 a kilogram to make, and it has a selling price of $4.00 a kilogram. A small portion of the annual produc- tion of Clean 236 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $8.00 per jar.
This further processing requires one-half kilogram of Clean 236 per jar of silver polish. The additional direct costs involved in the processing of a jar of silver polish are as follows:
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Other ingredients . . . . . . . . . . . . . . . . . . . . . . . . . .
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$ 1.30
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Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2.96
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Total direct cost . . . . . . . . . . . . . . . . . . . . . . . . . . .
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$4.26
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Overhead costs associated with the processing of the silver polish are as follows:
The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment, purchased two years ago, is special-purpose equipment acquired specifically to produce the silver polish. Its resale value is negligible and it does not wear out through use.
Direct labour is a variable cost at Clean and Shine Corporation.
Advertising costs for the silver polish total $8,000 per month. Variable selling costs associ- ated with the silver polish are 7.5% of sales.
Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Clean 236 as a cleaning powder.
Required:
1. What is the incremental contribution margin per jar from further processing Clean 236 into silver polish?
2. What is the minimum number of jars of silver polish that must be sold each month to justify the continued processing of Clean 236 into silver polish? Explain. Show all compu- tations in good form.
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