Question

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, 855,000 ounces of chemical input are processed at a cost of $207,000 into 570,000 ounces of floor cleaner and 285,000 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name FloorShine. The additional processing costs for this conversion amount to $258,700. Floor Shine sells at $21 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 285,000 ounces of another compound (TCP) to the 285,000 ounces of table cleaner. This joint process will yield 285,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $104,000. 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. Table Process Further Table Stain Remover Table (TSR) Polish (TP) Total 285,000 285,000 $171,000 $171,000 $342,000 Cleaner 285,000 $216,600 Production in ounces Revenues Costs: CDG costs TCP costs Total costs Weekly gross profit 69,000 O 69,000 $147,600 51,750 52,000 103,750 $67,250 51,750 103,500 ** 52,000 104,000 103,750 207,500 $67,250 $134,500 *If table cleaner is not processed further, it is allocated 1/3 of the $207,000 of CDG cost, which is equal to 1/3 of the total physical output. **If table cleaner is processed further, total physical output is 1,140,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

Answer 1

Solution: Part 1: Total 285000 Floor cleaner Table cleaner 570000 301 19000 11400 21 Ounces Yield / ounces per bottle No of bottles Price per bottle Total revenue Less : Cost of production Additional Processing cost Total weekly Gross Profit 399000 216600 615600 207000 258700 149900 Part 2: Floor cleaner Table Stain remover Table Polish Total | 570000 285000 285000 251 25 19000 11400 11400 Ounces Yield / ounces per bottle No of bottles Price per bottle TOTAL REVENUE Less : Cost of production Additional Processing cost=258700+104000 Total weekly Gross Profit 399000 171000 171000 741000 207000 362700 171300 Part 3: Management made wrong decision by choosing to not process table cleaner further. (as Gross profit under further processing is more)