Thompson Industrial Products Inc. (TIPI) is a diversified industrial-cleaner pro

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, 886,500 ounces of chemical input are processed at a cost of $209,100 into 591,000 ounces of floor cleaner and 295,500 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 $252,100.

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 295,500 ounces of another compound (TCP) to the 295,500 ounces of table cleaner. This joint process will yield 295,500 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $106,000. 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 $209,100 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,182,000 ounces. TSR and TP combined account for 50% of the total physical output and are each allocated 25% of the CDG cost.

(a)

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.

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

(3) Compare the resulting net incomes and comment on management’s decision.

Process Further Table
Cleaner Table Stain
Remover (TSR) Table
Polish (TP) Total Production in ounces 295,500 295,500 295,500 Revenues $224,580 $177,300 $177,300 $354,600 Costs:    CDG costs 69,700 * 52,275 52,275 104,550 **    TCP costs 0 53,000 53,000 106,000      Total costs 69,700 105,275 105,275 210,550 Weekly gross profit $154,880 $72,025 $72,025 $144,050

Explanation / Answer

1) Table Cleaner Not Processed Further Sales FloorShine (591,000 ÷ 30) X $18 $354,600 Table Cleaner (295,500 ÷ 25) X $19 $224,580 Total Sales $579,180 Less: COGS CDG costs $209,100 Additional costs of FloorShine $252,100 Total Costs $461,200 Gross profit $117,980 2) Table Cleaner Processed Further Sales FloorShine (591,000 ÷ 30) X $18 $354,600 Table Stain Remover (295,500 ÷ 25) X $15 $177,300 Table Polish (295,500 ÷ 25) X $15 $177,300 Total Sales $709,200 Less: COGS CDG costs $209,100 Additional costs of FloorShine $252,100 TCP $106,000 Total Costs $567,200 Gross profit $142,000 3) If the table cleaner is processed further overall company profits will be ($142000 - $117980 = $24020) higher. Therefore, management made the wrong decision by choosing to not process table cleaner further. $24,020

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