Problem 20-3A

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, 873,000 ounces of chemical input are processed at a cost of $207,300 into 582,000 ounces of floor cleaner and 291,000 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 $253,500. FloorShine sells at $22 per 30-ounce bottle. The table cleaner can be sold for $20 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 291,000 ounces of another compound (TCP) to the 291,000 ounces of table cleaner. This joint process will yield 291,000 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $102,000. Both table products can be sold for $15 per 25-ounce bottle. The company decided not to process the table cleaner into TSR and TP based on the following analysis.

The company decided not to process the table cleaner into TSR and TP based on the following analysis Process Further Table Stain Table Polish (TP) Table Remover (TSR) Cleaner Total Production in ounces 291,000 291,000 291,000 Revenues $174,600 $349,200 $232,800 $174,600 Costs: CDG costs 69,100 51,825 51,825 103,650 TCP costs 0 51,000 51,000 102,000 Total costs 205,650 69,100 102,825 102,825 Weekly gross profit $71,775 $143,550 $163,700 $71,775 If table cleaner is not processed further, it is allocated 1/3 of the $207,300 of CDG cost, which is equal to 1/3 of the total physical output If table cleaner is processed further, total physical output is 1,164,000 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 company's total weekly gross profit assuming the table cleaner is not processed further. Total weekly gross profit (2) Calculate the company's total weekly gross profit assuming the table cleaner is processed further. Total weekly gross profit (3) Compare the resulting net incomes and comment on management's decision decision by choosing to not process table cleaner further. Management made the Using incremental analysis, determine if the table cleaner should be processed further. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Don't Process Table Cleaner Further Net Income Process Table Cleaner Increase Further (Decrease) Incremental revenue Incremental costs Totals $ $ $