Question

Zytel 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 $2.40 a pound to make and sells for $3.60 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 $4.70 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 $2.10 per jar. Variable selling costs are $0.50 per jar. If the decision were made to cease production of the silver polish, $8,400 of Mixing Department fixed costs could be avoided. Zytel has limited production capacity for Grit 337, but unlimited demand for the cleaning powder. Required: Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.) Minimum number of jars

Answer 1

Solution 1:

Computation of Additional contribution Margin- If Grit 377 sold after further processing
Particulars	Grit 377 per 1/4 Pound	Silver Polish per jar	Net Increase/ (decrease)
Selling price per unit	$0.90	$4.70	$3.80
Variable Costs:
Making cost of Grit 337	$0.60	$0.60	$0.00
Other ingredients, labor, Overhead	$0.00	$2.10	$2.10
Variable Selling Cost	$0.00	$0.50	$0.50
Total variable costs	$0.60	$3.20	$2.60
Contribution margin	$0.30	$1.50	$1.20

Minimum number of jars of silver polish that must be sold each month = Avoidabe fixed cost / incremental contribution margin per jar

= 8400 / $1.20 = 7,000 jars