P7-3A Determine if product should be sold or processed further.

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company's Dargar plant

produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 900,000

ounces of chemical input are processed at a cost of $210,000 into 600,000 ounces of floor cleaner and 300,000 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 $240,000.

FloorShine sells at $20 per 30-ounce bottle. The table cleaner can be sold for $17 per 25-ounce bottle. However, the table

cleaner can be converted into two other products by adding 300,000 ounces of another compound (TCP) to the 300,000 ounces

of table cleaner. This joint process will yield 300,000 ounces each of table stain remover (TSR) and table polish (TP). The

additional processing costs for this process amounts to $100,000. Both table products can be sold for $14 per $25-ounce bottle.

The company decided not to process the table cleaner into TSR and TP based on the following analysis.

Process Further

Table

Table Stain

Table

Cleaner

Remover (TSR)

Polish (TP)

Total

Production in ounces

300,000

300,000

300,000

Revenue

$204,000

$168,000

$168,000

$336,000

Costs:

CDG costs

70000*

52,500

52,500

105,000

**

TCP costs

0

50,000

50,000

100,000

Total costs

70,000

102,500

102,500

205,000

Weekly gross profit

$134,000

$65,500

$65,500

$131,000

*If table cleaner is not processed further, it is allocated 1/3 of the $210,000 of CDG cost, which is equal to 1/3 of the

total physical output.

** If table cleaner is processed further, total physical output is 1,200,000 ounces. TSR and TP combined account for

50% of the total physical output and are each allocated 25% of the CDG cost.

Instructions

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.

(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.

(3) Compare the resulting net incomes and comment on management's decision.

(b)

Compare the resulting net incomes and comment on management's decision.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(1) Calculate the company's total weekly gross profit assuming the table cleaner is not processed further.

Table Cleaner Not Processed Further

Sales:

FloorShine

?

Table cleaner

?

Total Revenue

?

Costs:

CDG

Value

Additional costs of FloorShine

Value

Total costs

?

Gross profit

?

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further.

Table Cleaner Processed Further

Sales:

FloorShine

Value

Table Stain Remover

Value

Table Polish

Value

Total Revenue

?

Costs:

CDG

Value

Additional costs of FloorShine

Value

TCP

Value

Total costs

?

Gross profit

?

(a)

Determine if management made the correct decision to not process the table cleaner further by doing the following.

(3) Compare the resulting net incomes and comment on management's decision.

(b)

Compare the resulting net incomes and comment on management's decision.

Don't Process

Process

Net Income

Table Cleaner

Table Cleaner

Increase

Further

Further

(Decrease)

Incremental revenue

Value

Value

Value

Incremental costs

Value

Value

Value

Total

?

?

?

1.

After you have completed P7-3A, consider the following additional question.

Assume that the selling price of the two table products after further processing changed to $13

for each 25-ounce bottle and the cost of TCP compound to further process changed to $120,000.

How do these changes impact the decision to process or not process further?