Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner pro
ID: 2474144 • Letter: T
Question
Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner processing company. The company’s Dargan plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week, 922,500 ounces of chemical input are processed at a cost of $212,700 into 615,000 ounces of floor cleaner and 307,500 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 $242,000.
FloorShine sells at $18 per 30-ounce bottle. The table cleaner can be sold for $19 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 307,500 ounces of another compound (TCP) to the 307,500 ounces of table cleaner. This joint process will yield 307,500 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.
*If table cleaner is not processed further, it is allocated 1/3 of the $212,700 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,230,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.
Cleaner Table Stain
Remover (TSR) Table
Polish (TP) Total Production in ounces 307,500 307,500 307,500 Revenues $233,700 $184,500 $184,500 $369,000 Costs: CDG costs 70,900 * 53,175 53,175 106,350 ** TCP costs 0 51,000 51,000 102,000 Total costs 70,900 104,175 104,175 208,350 Weekly gross profit $162,800 $80,325 $80,325 $160,650
Explanation / Answer
Answer 1. Calculation of Weekly Profit if Table Cleaner is not processed further Sales Floor Shine (20500 Bottles X $18) 369,000 Table Cleaner (12300 Bottles X $19) 233,700 Total Sales 602,700 Costs CDG Costs 212,700 Additional processing Cost of Floor Shine 242,000 Total costs 454,700 Gross Profit 148,000 Answer 2. Calculation of Weekly Profit if Table Cleaner is processed further Sales Floor Shine (20500 Bottles X $18) 369,000 Table Stain Remover (12300 Bottles X $15) 184,500 Table Polish (12300 Bottles X $15) 184,500 Total Sales 738,000 Costs CDG Costs 212,700 Additional processing Cost of Floor Shine 242,000 TCP Cost 102,000 Total costs 556,700 Gross Profit 181,300 Answer 3. Management made the wrong decision by choosing to not process table cleaner further. Answer 4. Statement of Incremental Analysis Don't Process Table Cleaner Further Process Table Cleaner Further Net Income Increase (Decrease) Incremental revenue Sales 602,700 738,000 135,300 Incremental Costs (454,700) (556,700) (102,000) Totals 1,057,400 1,294,700 33,300
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