Come-Clean Corporation produces a variety of cleaning compounds and solutions fo
ID: 2509827 • 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 $1.20 a pound to make, and it has a selling price or $4.20 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: Other ingredients Direct labor 0.50 1.40 S 1.90 Total direct cost Overhead costs associated with processing the silver polish are 25% of direct labor cost Variable manufacturing overhead cost Fixed manufacturing overhead cost (per month) Production supervisor Depreciation of mixing equipment S 3,200 S 1,600 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. Direct labor is a variable cost at Come-Clean Corporation. Advertising costs for the silver polish total $1.800 per month, variable selling costs associated with the silver polish are 5% or 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 pronitable to sell all of the Grit 337 as a cleaning powderExplanation / Answer
Come-Clean Corporation
contribution margin of Grit 337:
Selling price
$4.20
per pound
production costs
$1.20
per pound
Contribution margin per pound
$3.00
Incremental contribution margin -
selling price of silver polish per jar
$4.00
selling price of 1/4th pound of Grit 337
$1.05
Incremental revenue per jar of silver polish
$2.95
Incremental variable cost per jar of silver polish:
other ingredients
$0.50
Direct labor
$1.40
variable overhead
$0.35
(25% of 1.40)
variable selling costs
$0.20
(5% of $4)
Total
$2.45
Incremental contribution margin = $2.95 - $2.45 = $0.50
Hence, the selling price of 1/4th pound of Grit 337 used in silver polish = 4.20 x ¼ = $1.05
Determination of 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:
Relevant costs associated with the production of silver polish are,
Production supervisor $3,200
Depreciation mixing department $1,600
Avoidable fixed costs $4,800
Minimum Number of jars of silver jar to be produced = avoidable fixed costs/incremental contribution margin
= $4,800/$0.50 = $9,600 jars
Further processing of Grit 337 into silver polish is suggested if the company is able to sell more than 9,600 jars of silver polish. However if the company sales level falls beyond 9,600 jars, the company can opt to sell Grit 337 without further processing.
contribution margin of Grit 337:
Selling price
$4.20
per pound
production costs
$1.20
per pound
Contribution margin per pound
$3.00
Incremental contribution margin -
selling price of silver polish per jar
$4.00
selling price of 1/4th pound of Grit 337
$1.05
Incremental revenue per jar of silver polish
$2.95
Incremental variable cost per jar of silver polish:
other ingredients
$0.50
Direct labor
$1.40
variable overhead
$0.35
(25% of 1.40)
variable selling costs
$0.20
(5% of $4)
Total
$2.45
Incremental contribution margin = $2.95 - $2.45 = $0.50