Problem 7-3A (Part Level Submission) Sutton Industrial Products Inc. (SIPI) is a
ID: 2421659 • Letter: P
Question
Problem 7-3A (Part Level Submission)
Sutton Industrial Products Inc. (SIPI) is a diversified industrial-cleaner processing company. The company’s Verde plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 910,350 ounces of chemical input are processed at a cost of $210,300 into 606,900 ounces of floor cleaner and 303,450 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 $244,045.
FloorShine sells at $21 per 30-ounce bottle. The table cleaner can be sold for $26 per 25-ounce bottle. However, the table cleaner can be converted into two other products by adding 303,450 ounces of another compound (TCP) to the 303,450 ounces of table cleaner. This joint process will yield 303,450 ounces each of table stain remover (TSR) and table polish (TP). The additional processing costs for this process amount to $103,700. 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.
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( Process Further )
Table Cleaner Table Stain Remover (TSR) Table Polish (TP) Total
Production in ounces 303,450 303,450 303,450
Revenue $315,588 $267,036 $267,036 $534,072
Costs:
CDG Costs 70,100* 52,575 52,575 105,150**
TCP Costs 0 51,850 51,850 103,700
Total Costs 70,100 104,425 104,425 208,850
Weekly Gross Grofit $245,488 $162,611 $162,611 $325,222
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*If table cleaner is not processed further, it is allocated 1/3 of the $210,300 of CDG cost, which is equal to 1/3 of the total physical output.
**If table cleaner is processed further, total physical output is 1,213,800 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.
Total weekly gross profit $_____________
(2) Calculate the company’s total weekly gross profit assuming the table cleaner is processed further.
Total weekly gross profit $_____________
(3) Compare the resulting net incomes and comment on management’s decision.
Management made the right/wrong decision by choosing to not process table cleaner furthe.
Explanation / Answer
(1) The company’s total weekly gross profit assuming the table cleaner is not processed further.
Total weekly gross profit = $286073
(2) The company’s total weekly gross profit assuming the table cleaner is processed further:
Before further processing of Table cleaner , Gross Profit = $286073
After further processing of Table cleaner , Gross Profit = $286073 - $245488 + (162611 * 2) = $365807
Total weekly gross profit = $365807
(3) the resulting net incomes before and after further processing is $286073 & $365807 respectively, so the management’s decision to not to process the Table cleaner further is not correct. They must go for further processing of Table cleaner as it increases the gross profit from $286073 to $365807.
Floor Cleaning Table Cleaning Total ounces 606900 303450 Processing cost 140200 70100 210300 Further Processing cost 244045 0 244045 Total costs 384245 70100 454345 Revenue 424830 315588 740418 Gross Profit $40585 $245488 286073