nowt (c) What non-financial factors should it consider in the decision? P7-50B B
ID: 2543166 • Letter: N
Question
nowt (c) What non-financial factors should it consider in the decision? P7-50B Bonita Household Products Co. is a diversified household-cleaner processing company. The company's (SO 4) St. Lawrence plant produces two products from a common set of chemical inputs (TLC): a glass cleaner and a metal Determine whether a cleaner. Each week 30,000 litres of chemical input are processed at a cost of $200,000 into 20,000 litres of metal cleaner product should be sold and 10,000 litres of glass cleaner. The metal cleaner has no market value until it is converted into a polish with the trade or name MetalShine. The additional processing costs for this conversion total $270,000. MetalShine sells for $15 per 750-ml d further. bottle. The glass cleaner can be sold for $24 per 750-ml bottle. However, the glass cleaner can be converted into two other products by adding 10,000 litres of another compound (MST) to the 10,000 litres of glass cleaner. This joint process will yield 10,000 litres each of plastic cleaner and plastic polish. The additional processing costs for this process total $140,000. Both plastic products can be sold for $20 per 750-ml bottle. The company decided not to process the glass cleaner into plastic cleaner and plastic polish based on the following analysis: Plastic Cleaner Cleaner Process Further Plastic Polish Total Production in litres (10,000) 10,000 Revenue TLC cost MST cost Total costs 10,000 $240,000 $200,000 $200,000 $400,000 80,000 0 70,000 70.000140.000 50,000 40,000 0,00 100100000000 110,000 110,000 Weekly gross profit $190,000 90.000 $ 90,000 $180.000 "If the glass cleaner is not processed further,it is allocated one quarter of the $200,000 of TLC cost, because it represents one quarter of the total physical output. If the glass cleaner is processed further, the total physical output is 40,000 litres, Plastic cleaner and plastic polish combined account for 40% of the total physical output and are each allocated 20% of the TLC cost. Instructions (a) Do the following to determine whether management made the correct decision by not processing the glass cleaner further: I. Calculate the company's total weekly gross profit assuming the glass cleaner is not processed further. 2. Calculate the company's total weekly gross profit assuming the glass cleaner is processed further 3. Compare the resulting net incomes 2. Gross profit: $323,333 and comment on management's decision. (b) Using incremental analysis, determine whether the glass cleaner should be processed further (adapted from CMA Canada, now CPA Canada) Quik Press Inc. offers one-day dry cleaning. At the beginning of 2015, the company purchased a mechanized P7-51B (SO 5)Explanation / Answer
Assuming Glass Cleaner is not processed further
Particulars
Quantity
Sale value
Amount
Total Revenue
Sale of Metalshine
26,667
15
4,00,000
Sale of glass cleaner
2,40,000
Total Revenue
6,40,000
Total Costs
Chemical Input (TLC)
2,00,000
Conversion costs (metalshine)
2,70,000
Total direct Costs
4,70,000
Weekly Gross Profit
1,70,000
Assuming Glass Cleaner is processed further
Particulars
Quantity
Sale value
Amount
Total Revenue
Sale of Metalshine
26,667
15
4,00,000
Sale of plastic cleaner
2,00,000
Sale of plastic polich
2,00,000
Total Revenue
8,00,000
Total Costs
Chemical Input (TLC)
2,00,000
Conversion costs (metalshine)
2,70,000
Additional MST costs
1,40,000
Total direct Costs
6,10,000
Weekly Gross Profit
1,90,000
Therefore, company's weeklky Gross profit is more when the glass cleaner is further processed.
In case of further processing, the calculations as per the company are showing lesser gross profit because the company has changed the allocation of fixed costs
As per the incremental cost approach, the company needs to analyse and compare the incremental costs vis-à-vis incremental revenu generated by any decision
Therefore,, the company should further process the Glass Cleaners
Assuming Glass Cleaner is not processed further
Particulars
Quantity
Sale value
Amount
Total Revenue
Sale of Metalshine
26,667
15
4,00,000
Sale of glass cleaner
2,40,000
Total Revenue
6,40,000
Total Costs
Chemical Input (TLC)
2,00,000
Conversion costs (metalshine)
2,70,000
Total direct Costs
4,70,000
Weekly Gross Profit
1,70,000
Assuming Glass Cleaner is processed further
Particulars
Quantity
Sale value
Amount
Total Revenue
Sale of Metalshine
26,667
15
4,00,000
Sale of plastic cleaner
2,00,000
Sale of plastic polich
2,00,000
Total Revenue
8,00,000
Total Costs
Chemical Input (TLC)
2,00,000
Conversion costs (metalshine)
2,70,000
Additional MST costs
1,40,000
Total direct Costs
6,10,000
Weekly Gross Profit
1,90,000
Therefore, company's weeklky Gross profit is more when the glass cleaner is further processed.
In case of further processing, the calculations as per the company are showing lesser gross profit because the company has changed the allocation of fixed costs
As per the incremental cost approach, the company needs to analyse and compare the incremental costs vis-à-vis incremental revenu generated by any decision
Therefore,, the company should further process the Glass Cleaners
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