Question

Cantel Company produces cleaning compounds for both commercial and household customers. Some of these products are produced as part of a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for commercial sale, costs $1.90 a pound to make and sells for $2.00 per pound. A portion of the annual production of GR37 is retained for further processing in a separate department where it is combined with several other ingredients to form SilPol, which is sold as a silver polish, at $4.00 per unit. The additional processing requires 1/4 pound of GR37 per unit; additional processing costs amount to $3.10 per unit of SilPol produced. Variable selling costs for SilPol average $0.20 per unit. If production of SilPol were discontinued, $3,000 of costs in the processing department would be avoided. Cantel has, at this point, unlimited demand for, but limited capacity to produce, product GR37.

Required

1. Calculate the minimum number of units of SilPol that would have to be sold in order to justify further processing of GR37.

2. Assume that the cost data reported for GR37 are obtained at a level of output equal to 5,600 pounds, which is the maximum that the company can produce at this time. What is the expected operating income (loss) under each of the following scenarios: (a) all available capacity is used to produce GR37, but no SilPol; (b) 11,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; (c) 15,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; and (d) 17,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37.

1. Calculate the minimum number of units of SilPol that would have to be sold in order to justify further processing of GR37. (Round your answer to nearest whole number.)

2. Assume that the cost data reported for GR37 are obtained at a level of output equal to 5,600 pounds, which is the maximum that the company can produce at this time. What is the expected operating income (loss) under each of the following scenarios: (a) all available capacity is used to produce GR37, but no SilPol; (b) 11,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; (c) 15,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37; and (d) 17,000 units of SilPol are produced, with the balance of capacity devoted to the production and sale of GR37. (Loss amounts should be indicated with a minus sign.)

Answer 1

1. Incremental revenue from SilPol = $ 4-$ (2.00 x 1/4) = $ 3.50. Incremental variable costs = $ (3.10 +0.20) = $ 3.30 The joint cost of $ 1.90 a pound is not relevant, as it has already been incurred in the past, and cannot be changed, whatever the decision is taken. Contribution margin per unit of SilPol = $ 3.50 - $ 3.30 = $ 0.20. As avoidable costs are $3,000, the minimum number of Silpol that need to be sold in order to justify further processing of GR37 =$3,000 / S 0.20 = 15,000 units. d Alternative Revenues: Revenue (GR37) $11,200 $ 5.700 $ 3.700 S 2.700 Revenue (SilPol) $ - $44,000 $60,000 $68,000 Total Revenues $ 11,200 $ 49,700 $63,700 $70,700 Less: Costs Joint Cost $10,640 $10,640 $10,640 $10,640 Processing Costs $ - $ 34,100 $46,500 $52,700 Variable Selling Costs $ - $ 2,200 $ 3,000 $ 3,400 Avoidable Fixed Costs $ - $ 3,000 $ 3,000$ 3,000 Total Costs $10,640 $49,940 $63,140 $69,740 Operating Income (Loss) $ 560 $ (240) $ 560 $ 960