Come-Clean Corporation produces a variety of cleaning compounds and solutions fo
ID: 2531610 • 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 $6.80 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 $5.00 per jar This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct varable costs involved in the processing of a jar of silver polish are Other ingredients Direct labor $ 0.60 1.40 Total direct cost $ 2.00 Overhead costs associated with processing the silver polish are Variable manufacturing overhead cost Fixed manufacturing overhead cost (per month) Production supervisor Depreciation of mixing equipment 25% of direct labor cost $ 3,400 $ 1,500 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. It can produce up to 10,500 jars of polish per month. Its resale value is negligible and it does not wear out through use Advertising costs for the silver polish total $3,600 per month. Variable selling costs associated with the silver polish are 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. Required: 1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.) 2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.) 3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.) 4. If the company sells 8,500 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.) 5. If the company sells 11,500 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any "disadvantages" as a negative value. Round your intermediate calculations to 2 decimal places.Explanation / Answer
Part 1 and 2 Incremental revenue from further processing of the Grit 337 Selling price of the silver polish, per jar $5.00 Less: Selling price of 1/4 pound of Grit 337 ($6.80 ÷ 4) $1.70 Incremental revenue per jar $3.30 Part 1 Incremental variable costs Other ingredients $0.60 Direct labor $1.40 Variable manufacturing overhead (25% × $1.40) $0.35 Variable selling costs (5% × $5) $0.25 Incremental variable cost per jar $2.60 Incremental Contribution Margin Per Unit $0.70 Part 2 3) Only the cost of advertising and the cost of the production supervisor are avoidable if production of the silver polish is discontinued. Production Supervisor $3,400.00 Advertising—direct $3,600.00 Avoidable fixed costs $7,000.00 Number of Jars Sold = Avoidable Fixed cost/Incremental Contribution Margin Number of Jars Sold = $7000/$.70 10000.00 Jars per Month 4 and 5 8,500 Jars of Polish 10000 Jars of Polish 11,500 Jars of Polish or 2,125 pounds of Grit 337 or 2500 pounds of Grit 337 or 2,875 pounds of Grit 337 Sales of Silver Polish: Sales @ $5.00 per jar $42,500.00 $50,000.00 $57,500.00 Less: Variable Costs: Production cost of Grit 337 @ $1.60 per pound $3,400.00 $4,000.00 $4,600.00 Further processing and selling costs of the polish @ $2.60 per jar $22,100.00 $26,000.00 $29,900.00 Total variable expenses $25,500.00 $30,000.00 $34,500.00 Contribution Margin $17,000.00 $20,000.00 $23,000.00 Avoidable fixed costs Production Supervisor $3,400.00 $3,400.00 $3,400.00 Advertising—direct $3,600.00 $3,600.00 $3,600.00 Total Avoidable fixed costs $7,000.00 $7,000.00 $7,000.00 Total contribution to common fixed costs and to profits $10,000.00 $13,000.00 $16,000.00 Sales of Grit 337: Sales @ $6.80 per pound $14,450.00 $17,000.00 $19,550.00 Variable expenses: Production cost of Grit 337 @ $1.60 per pound $3,400.00 $4,000.00 $4,600.00 Contribution to common fixed costs and to profits $11,050.00 $13,000.00 $14,950.00 Financial Advantages (Disadvantages) -$1,050.00 $0.00 $1,050.00