Problem 20-03A

Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The companys Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week, 855,000 ounces of chemical input are processed at a cost of $207,000 into 570,000 ounces of floor cleaner and 285,000 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 $18 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 285,000 ounces of another compound (TCP) to the 285,000 ounces of table cleaner. This joint process will yield 285,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount 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 Cleaner				Table Stain Remover (TSR)		Table Polish (TP)		Total
Production in ounces		285,000				285,000		285,000
Revenues		$193,800				$159,600		$159,600		$319,200
Costs:
CDG costs		69,000	*			51,750		51,750		103,500	**
TCP costs		0				50,000		50,000		100,000
Total costs		69,000				101,750		101,750		203,500
Weekly gross profit		$124,800				$57,850		$57,850		$115,700

*If table cleaner is not processed further, it is allocated 1/3 of the $207,000 of CDG cost, which is equal to 1/3 of the total physical output. **If table cleaner is processed further, total physical output is 1,140,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

Determine if management made the correct decision to not process the table cleaner further by doing the following. (1) Calculate the companys total weekly gross profit assuming the table cleaner is not processed further.

Total weekly gross profit

$

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

Total weekly gross profit

$

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

Management made the

rightwrong

decision by choosing to not process table cleaner further.