Ohio Household Products Co. (OHPC) is a diversi ed household-cleaner process- ing company. The companys 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 $300,000.

(a) NI (decrease) ($4,750) (c) NI increase $1,250

Determine if product should be sold or processed further.

Shine Brite sells at $15 per 25-ounce bottle. The general-purpose cleaner can be sold for $20 per 20-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 $16 per 20-ounce bottle.

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

Instructions

(a) Determine if management made the correct decision to not process the general-purpose cleaner further by doing the following.

(1) Calculate the companys total weekly gross pro t assuming the general-purpose

cleaner is not processed further.

(2) Calculate the companys total weekly gross pro t assuming the general-purpose

cleaner is processed further.

(3) Compare the resulting net incomes and comment on managements decision.

(b) Using incremental analysis, determine if the general-purpose cleaner should be pro- cessed further.

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