Question

Come Clean Corporation produces a variety 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 Grit 337 and its Sparkle silver polish Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.20 a pound to make, and it has a selling price of $760 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 Grit 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 $ 0.55 1.36 $ 1.91 Overhead costs associated with processing the silver polish are: Variable manufacturing overhead cost 25% of direct labor cost Fixed manufacturing overhead cost (per month) Production supervisor $ 3,500 Depreciation of mixing equipment $1,600 The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special- purpose equipment acquired specifically to produce the silver polish. It can produce up to 11,500 jars of polish per month. Its resale value is negligible and it does not wear out through use. Advertising costs for the silver polish total $2,500 per month Variable selling costs associated with the silver polish are 5% of sales. Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder

Answer 1

1 Incremental Revenue 2 Incremental Contribution Margin 3 Number of Jars that must be Sold 4 Financial Advantage (Disadvantage) 5 Financial Advantage (Disadvantage) $ 3.10 Per Jar $ 0.60 Per Jar 10000 Per Month $ (1,380) $ 900 Working Note: Requirement (1) Particulars Selling Price of Silver Polish per Jar Less : Selling Price of 1/4 Pound of Grit 337 Incremental Revenue Per Jar Amount $ 5.00 $ (1.90) $ 3.10 Amount Amount $ 3.10 Requirement (2) Particulars Incremental Revenue Per Jar Less : Incremental variable Costs Per Jar Other Ingredients Direct Labour Variable MOH (25%*$1.36) Variable Selling Costs (5%*5) $ $ $ $ 0.55 1.36 0.34 0.25 $ 2.50 $ 0.60 Incremental Contribution Margin Per Jar Requirement (3) Particulars Production Super Visor Advertising - Direct Avoidable Fixed Costs Amount $ 3,500 $ 2,500 $ 6,000 10000 Jars Number of Jars that must be sold : $6,000 / 0.60 Requirement (4) Particulars Incremental Contribution Margin Per Jar Number of Jars sold Incremental Contribution Margin Less : Avoidable Costs Financial Advantage (Disadvantage) Amount $ 0.60 7700 $ 4,620 $ 16,000) $ (1,380 Requirement (5) Particulars Number of Jars that must be sold : Number of Jars sold Incremental Contribution Margin Less : Avoidable Costs Financial Advantage (Disadvantage) Amount $ 0.60 11500 $ 6,900 $ 16,000 $ 900 Note : Please Comment down for any further clarifications / Issues.