Juarez Corporation produces cleaning compounds and solutions for industrial and

Question

Juarez Corporation produces cleaning compounds and solutions for industrial and household use. While most of its products are processed independently, a few are related. Grit 337, a coarse cleaning powder with many industrial uses, costs $2.60 a pound to make and sells for $3.80 a pound. A small portion of the annual production of this product is retained for further processing in the Mixing Department, where it is combined with several other ingredients to form a paste, which is marketed as a silver polish selling for $6.00 per jar. This further processing requires 1/4 pound of Grit 337 per jar. Costs of other ingredients, labor, and variable overhead associated with this further processing amount to $2.10 per jar. Variable selling costs are $0.30 per jar. If the decision were made to cease production of the silver polish, $9,800 of Mixing Department fixed costs could be avoided. Juarez has limited production capacity for Grit 337, but unlimited demand for the cleaning powder. Required: Calculate the minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole number.)

Explanation / Answer

Solution:

Selling price of silver polish = $6 per jar

Relevant variable cost of silver polish per jar = Further processing cost + Loss of sale of Grit 337 per jar

= ($3.80/4) + $2.10 + $0.30 = $3.35 per jar

Contribution per jar of sliver polish = $6 - $3.35 = $2.65 per jar

Avoidable fixed cost of mixing department = $9,800

Minimum number of jars of silver polish that would have to be sold to justify further processing of Grit 337 =

$9,800 / $2.65 = 3698 jars

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