Question
Sutton Industrial Products Inc. (SIPI) is a diversified industrial-cleaner processing company. The companys Verde plant produces two products: a table cleaner and a floor cleaner
Sutton Industrial Products Inc. (SIPI) is a diversified industrial-cleaner processing company. The companys Verde plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 907,650 ounces of chemical input are processed at a cost of $208,200 into 605,100 ounces of floor cleaner and 302,550 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 $259,838. FloorShine sells at $19 per 30-ounce bottle. The table cleaner can be sold for $29 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 302,550 ounces of another compound (TCP) to the 302,550 ounces of table cleaner. This joint process will yield 302,550 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $105,200. Both table products can be sold for $22 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 302,550 302,550 302,550 Revenue $350,958 $266,244 $266,244 $532,488 Costs: CDG costs 69,400 * 52,050 52,050 104,100 ** TCP costs 0 52,600 52,600 105,200 Total costs 69,400 104,650 104,650 209,300 Weekly gross profit $281,558 $161,594 $161,594 $323,188 *If table cleaner is not processed further, it is allocated 1/3 of the $208,200 of CDG cost, which is equal to 1/3 of the total physical output. **If table cleaner is processed further, total physical output is 1,210,200 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost. Collapse question part (a) 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 decision by choosing to not process table cleaner further.
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