Problem 13-27 (Algo) Sell or Process Further Decisions [LO13-7]

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 companys Grit 337 and its Sparkle silver polish.

Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound to make, and it has a selling price of $2.60 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 $4.00 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	$ 0.60
Direct labor	1.48
Total direct cost	$ 2.08

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	$ 3,100
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 16,500 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 $3,900 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.

Required:

1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.)

2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.)

3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.)

4. If the company sells 10,500 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling it as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.)

5. If the company sells 13,000 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.)

parpose equipment wcquired speciferty to produte the alluer polhh. it cas produce up to 16.500 jars of polish per month. its resale viue is necligible and it does not wear out through ine Advertising coss for the sfver podsh total $3,900 per roost, Vatable seling costs assoclated weth the sfver pollsti aie 5 b of sales Due so a recent decine in the demave for alver polsh the company is wandering whiether its continued production is advisable. The sales manager fees that it would the more profiable to sell all of the Grit 337 as a cleaning povder. Required: 1 How much incremental reverue does the company ean per jar of possh by further processing Grit z3? ratinet than seling it as at clearing powter? Alound your nnwwer to 2 decimal ploces.) 2 How much incremental cortotoulon margn does the compary eam per jar of polbh ty further frocesikg Gill 337 rather than welling in as a clemeing powder? (Reund your intermediase coleuletions ind firel anwwer to 2 deeimal places) 2. How many fars of silver polvh must be sold eoch month to exactiy ofset the avoidibe fiand costs incured to produce and seti the polisy? (Alound yeur irererediete coltulatiens so 2 decimel plects.) 4 ti the compary sells so.500 jars of polivh, whot is the Inancial advantage idisadvantaget of chooting to futher prooess Grk 333 ? fafter than seding it as a deaning powder? (Enter any "disndvameges" as o negstive velue. Round your intermediet celculestens to 2 detimal pisesus lafter than celing is as a chesing powder? AEnter aky "disedventages" as a negatlve value. Aound your intermediete calculatiens 10 2 detimal plecas.)