Come-Clean Corporation produces a variety of cleaning compounds and solutions fo
ID: 2447216 • Letter: C
Question
Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish. Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound to make, and it has a selling price of $2.00 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $4.00 per jar. This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct costs involved in the processing of a jar of silver polish are
The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. Its resale value is negligible and it does not wear out through use.
Advertising costs for the silver polish total $4,000 per month. Variable selling costs associated with the silver polish are 7.5% of sales.
Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.
* I got the incremental contribution margin as $0.70 per jar for further processing*
I need help with the second part of the question:
What is the minimum number of jars of silver polish that must be sold each month to justify the continued processing of Grit 337 into silver polish?
Other ingredients 0.65 Direct labor 1.48 Total direct cost $ 2.13Explanation / Answer
Calculation of minimum number of jars of silver polish that must be sold each month to justify the continued processing of Grit 337 into silver polish:
Additional Relevant fixed costs to be incurred:
Production supervisor
$ 3,000
Depreciation of mixing equipment
$ 1,400
Advertising costs for the silver polish
$ 4,000
Total Additional Relevant fixed costs to be incurred:
$ 8,400
Incremental contribution margin per jar for further processing
$ 0.70
Minimum number of jars = 8400 / 0.70
12000
Hence minimum 12000 number of jars of silver polish that be sold each month to justify the continued processing of Grit 337 into silver polish:
Calculation of minimum number of jars of silver polish that must be sold each month to justify the continued processing of Grit 337 into silver polish:
Additional Relevant fixed costs to be incurred:
Production supervisor
$ 3,000
Depreciation of mixing equipment
$ 1,400
Advertising costs for the silver polish
$ 4,000
Total Additional Relevant fixed costs to be incurred:
$ 8,400
Incremental contribution margin per jar for further processing
$ 0.70
Minimum number of jars = 8400 / 0.70
12000
Hence minimum 12000 number of jars of silver polish that be sold each month to justify the continued processing of Grit 337 into silver polish: