Question

Come Clean Corporation produces a vanety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company's Grt 337 and its Sparkle silver polish Gmt 337 is a coarse cleaning powder with many industrial uses. It costs $1.60. a pound to make, and it has a selling price of $6.50 a pound. A small portion of the annual production of Grit 337 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 $5.00 per jar. This further processing requires one-fourth pound of Grt 337 per jar of silver polish. The additional direct variable costs Involved in the processing of a jar of silver polish are: Other ingredients Direct labor Total direct cost $ 8.65 148 $ 2.13 Overhead costs associated with processing the silver polish are: 25% of direct labor cost Variable manufacturing overhead cost Fixed manufacturing overhead cost per month): Production supervisor Depreciation of mixing equipment $3 188

Answer 1

Solution 1:

Revenue per Jar of silver polish = $5 per jar

Revenue per 1/4th pound of Grit 337 = $6.60 / 4 = $1.65

Incremental revenue per jar for further processing = $5 - $1.65 = $3.35 per jar

Solution 2:

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	$1.65	$5.00	$3.35
Variable Costs:
Making cost of Grit 337	$0.40	$0.40	$0.00
Other ingredients	$0.00	$0.65	$0.65
Direct labor	$0.00	$1.48	$1.48
Variable Manufacturing Overhead	$0.00	$0.37	$0.37
Variable Selling Cost	$0.00	$0.25	$0.25
Total variable costs	$0.40	$3.15	$2.75
Contribution margin	$1.25	$1.85	$0.60

Solution 3:

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

= ($3100+$2900) / $0.60 = 10,000 jars

Solution 4:

If company sells 8900 jars of polish then incremental contribution margin of further processing = 8900 * $0.60 = $5,340

Avoidable fixed cost = $6,000

Financial advantage (disadvantage) of further processing = $5,340 - $6,000 = ($660)

Solution 5:

If company sells 11800 jars of polish then incremental contribution margin of further processing = 11800 * $0.60 = $7,080

Avoidable fixed cost = $6,000

Financial advantage (disadvantage) of further processing = $7,080 - $6,000 = $1,080