Come-Clean Corporation produces a variety of cleaning compounds and solutions fo

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 $3.60 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 variable costs involved in the processing of a jar of silver polish are: 0ther ingredients Direct labor $0.65 1.40 $2.05 Total direct cost 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 $3,100 $1,500

Explanation / Answer

Incremental revenue Sale of 1 jar polish 4 Sale of 1/4 th of Grit 337---(1/4*3.60) 0.9 Incremental revenue (4-3.9) 3.1 Incremental costs in further processing: Other ingredients 0.65 Direct labor 1.4 VMOH 25%* 1.4 0.35 VSOH 5%*4 0.2 Total incremental costs 2.6 Avoidable fixed costs MOH-prodn.supervisor 3100 Depn.of eqpt. 1500 Advertising costs 1900 Total 6500 Minimum no.of jars that must be sold to cover the additional fixed costs = Avoidable Fixed costs/Incl. Contn.=6500/0.5= 13000 Jars per mth. 4. 7500 jars of polish 7500*(0.5)-6500= -2750 5. 11800 jars of polish 11800*(0.5)-6500= -600 1. Incremental revenue 4-(1/4*3.6)= 3.1 2. Incremental contribution margin 3.1-2.6= 0.5 3. Number of jars that must be sold p.m. 13000 4. Financial (Disadvantage) -2750 5. Financial (Disadvantage) -600

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