d Come-Clean Corporation produces a variety of cleaning compounds and solutions
ID: 2450193 • Letter: D
Question
d
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 of $7.40 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 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 $3,500 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.
What is the incremental contribution margin per jar from further processing of Grit 337 into silver polish?(Do not round intermediate calculations. Round your answer to 2 decimal places.)
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? (Round your intermediate calculations to 2 decimal places.)
rev: 09_20_2014_QC_54435
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WorksheetDifficulty: 3 HardLearning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further.
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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 of $7.40 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 costs involved in the processing of a jar of silver polish are:
Explanation / Answer
Given that, cost of Grit 337= $1.20 and it has a selling price of $7.40 a pound
We know that, Contribution Margin = Sales - Variable Costs
1. Contribution Margin of Grit 337 = ($7.40 - $1.20) = $6.20
When Further Processed for Silver Polish,
Sales = $5 per jar,
Additional Variable Costs = Total Direct Costs + Variable manufacturing overhead cost + Selling Costs
$ 1.86 + 25% of $1.36 + 5 % of $ 5 = $1.86+ $0.34 + $0.25 = $2.45
Hence, Incremental Contribution Margin for Silver Polish = $ 5- 2.45 = $2.55
b. The minimum number of jars would be equal to the quantity at which the company is able to cover its fixed and variable costs or the break even quantity.
Hence, Breakeven point in units for silver polish would be Fixed Expenses per month / Contribution margin per jar
Fixed Expenses per month = Fixed manufacturing overhead cost + Advertising Costs = $3500+$1500+$3500 = $8500
Contribution Margin per jar = Cost of Grit 337 + Incremental Contribution Margin per Jar = $1.20 + $2.55 = $3.75
Therefore the breakeven point would be = 8500/3.75 = 2266 units approximately.
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