PROBLEM 10-27A Sell or Process Further [LO10-7] Come-Clean Corporation produces

Question

PROBLEM 10-27A Sell or Process Further [LO10-7] 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 com- pany'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 Total direct cost.. . $2.13 Overhead costs associated with processing the silver polish are Variable manufacturing overhead cost . . . . . . . . . . . . . . . . . . . . Fixed manufacturing overhead cost (per month): 25% of direct labor cost $3,000

Explanation / Answer

Solution 1:

Therefore Incremental contribution Margin = $0.70 per jar

Solution 2:

Minimum number of jars of silver polish tht must be sold each month = Avoidabe fixed cost / incremental contribution margin per jar

= ($3000+$4000) / $.70 = 10,000 jars

Computation of Additional contribution Margin- If Grit 377 sold after further processing Particulars Grit 377 per 1/4 Pound Silver Polish per jar Net Increase/ (decrease) Sale per jar $0.50 $4.00 $3.50 Variable Costs: Making cost $0.40 $1.05 $0.65 Direct labour $0.00 $1.48 $1.48 Variable Manufacturing Overhead $0.00 $0.37 $0.37 Variable Selling Cost $0.00 $0.30 $0.30 Total variable costs $0.40 $3.20 $2.80 Addition Contribution margin $0.10 $0.80 $0.70

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