Indiana Household Products Co. (IHPC) is a diversified household-cleaner processing company. The company's Mishawaka plant produces two products: an appliance cleaner and a general-purpose cleaner from a common set of chemical inputs (NPR). Each week 1,000,000 ounces of chemical input are processed at a cost of $200,000 into 750,000 ounces of appliance cleaner and 250,000 ounces of general-purpose cleaner.

The appliance cleaner has no market value until it is converted into a polish with the trade name Shine Brite. The additional processing costs for this conversion amount to $270,000. Shine Brite sells at $15 per 25-ounce bottle. The general-purpose cleaner can be sold for $24 per 25-ounce bottle. However, the general-purpose cleaner can be converted into two other products by adding 250,000 ounces of another compound (PST) to the 250,000 ounces of general-purpose cleaner. This joint process will yield 250,000 ounces each of premium cleaner (PC) and premium stain remover (PSR). The additional processing costs for this process amount to $140,000. Both premium products can be sold for $20 per 25-ounce bottle.

The company decided not to process the general-purpose cleaner into PC and PSR based on the following analysis.

*If general-purpose cleaner is not processed further, it is allocated 1/4 of the $200,000 of
NPR cost, which is equal to 1/4 of the total physical output.
**If general-purpose cleaner is processed further, total physical output is 1,250,000 ounces. PC and PSR combined account for 40% of the total output and are each allocated
20% of the NPR cost.

Instructions
(a) Determine if management made the correct decision to not process the general-purpose cleaner further by doing the following.
(1) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is not processed further.
(2) Calculate the company's total weekly gross profit assuming the general-purpose cleaner is processed further.
(3) Compare the resulting net incomes and comment on management's decision.
(b) Using incremental analysis, determine if the general-purpose cleaner should be processed further.

(CMAadapted)

Transcribed Image Text:

Process Further Premium Stain Remover (PSR) 250,000 $200,000 General Purpose Cleaner Premium Cleaner (PC) Total Production in ounces Revenue Costs: 250,000 $240,000 250,000 $200,000 $400,000 NPR costs PST costs 50,000* 0 50,000 $190,000 40,000 70,000 110,000 $90,000 40,000 70,000 110,000 90,000 80,000 140,000 220,000 $180,000 Total costs Weekly gross profit