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, 895,500 ounces of chemical input are processed at a cost of $210,900 into 597,000 ounces of floor cleaner and 298,500 ounces of table cleaner. The floor cleaner has no market value until it is converted into a polish with the trade name Floor Shine. The additional processing costs for this conversion amount to $248,100. Floor Shine sells at $19 per 30-ounce bottle. The table cleaner can be sold for $20 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 298,500 ounces of another compound (TCP) to the 298,500 ounces of table cleaner. This joint process will yield 298,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $107,000. 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.

Answer 1

Solution:

(1)

Sales:
Floorshine ( 597,000/30 x 19)	378,100
Table Cleaner( 298,500/ 25 ) x 20	238,800
Total Sales		616,900
Costs:
CDG costs	210,900
Additional Processing costs	248,100
Total cost		459,000
Gross Profit		$157,900

2)

Sales:
Floorshine ( 597,000/30 x 19)	378,100
Table Stain remover (298,500/ 25 ) x 15	179,100
Table Polish (298,500/ 25 ) x 15	179,100
Total		736,300
Costs:
CDG costs	210,900
Additional Processing costs	248,100
TCP costs	107,000
Total cost		566,000
Gross Profit		$170,300

3) a)

Management made the wrong decision by not processing table cleaner because in spite of an additional cost of $ 107,000  net profit by processing the table cleaner further into table stain remover and table polish would have increased by ($170,300 - $ 157,900 = $12,400).

b)

	Don't process table cleaner further	Process table cleaner further	Net Income Increase (Decrease)
Incremental revenue	238,800	358,200	119,400
Incremental Costs	0	107,000	(107,000)
Totals	$ 238,800	$ 251,200	$ 12,400

Since there is an additional profit of $12,400 TPI should further process Table cleaner.

Explanation:

If TPI does not process table cleaner further , the incremental sales would be the sales from table cleaner only $238,800. But if TPI decides to process table cleaner further, the incremental sales would be of both table stain remover and table polish ( 179,100 + 179,100 = 358,200). Here sales from floor cleaner is not considered because it is not relevant in decision making as floor cleaner will be sold whether TPI further processes table cleaner or not.

Similarly incremental costs are additional costs incurred in choosing one of the above options. There is no incremental cost if TPI does not process table cleaner because all costs have been already incurred to produce table cleaner. Whereas there is an incremental cost of $ 107,000 (TCP Costs) when TPI decides to process table cleaner.