Ohio Household Products Co. (OHPC) is a diversi ed household-cleaner process- in
ID: 2550967 • Letter: O
Question
Ohio Household Products Co. (OHPC) is a diversi ed household-cleaner process- ing company. The company’s Mishawaka plant produces two products: an appliance cleaner and a general-purpose cleaner from a common set of chemical inputs (NPR). Each week 1,000,000 ounces of chemical input are processed at a cost of $200,000 into 750,000 ounces of appliance cleaner and 250,000 ounces of general-purpose cleaner. The appliance cleaner has no market value until it is converted into a polish with the trade name Shine Brite. The additional processing costs for this conversion amount to $300,000.
(a) NI (decrease) ($4,750) (c) NI increase $1,250
Shine Brite sells at $15 per 25-ounce bottle. The general-purpose cleaner can be sold for $20 per 20-ounce bottle. However, the general-purpose cleaner can be converted into two other products by adding 250,000 ounces of another compound (PST) to the 250,000 ounces of general-purpose cleaner. This joint process will yield 250,000 ounces each of premium cleaner (PC) and premium stain remover (PSR). The additional processing costs for this process amount to $140,000. Both premium products can be sold for $16 per 20-ounce bottle.
The company decided not to process the general-purpose cleaner into PC and PSR based on the following analysis.
Instructions
(a) Determine if management made the correct decision to not process the general-purpose cleaner further by doing the following.
(1) Calculate the company’s total weekly gross pro t assuming the general-purpose
cleaner is not processed further.
(2) Calculate the company’s total weekly gross pro t assuming the general-purpose
cleaner is processed further.
(3) Compare the resulting net incomes and comment on management’s decision.
(b) Using incremental analysis, determine if the general-purpose cleaner should be pro- cessed further.
Process Further General- Purpose Cleaner 250,000 $250,000 Premium Premium Stain Cleaner (PC) 250,000 $200,000 Remover (PSR) 250,000 $200,000 Total Production in ounces Revenue Costs: $400,000 40,000 70,000 110,000 $ 90,000 80,000* 140,000 220,000 $180,000 NPR costs PST costs 50,000* 40,000 50,000 $200,000 70,000 110,000 $ 90,000 Total costs Weekly gross profit *If general-purpose cleaner is not processed further, it is allocated 1/4 of the $200,000 of NPR cost, which is equal to 1/4 of the total physical output. **If general-purpose cleaner is processed further, total physical output is 1,250,000 ounces. PC and PSR combined account for 40% of the total output and are each allocated 20% of the NPR cost.Explanation / Answer
Answer:
(a)
(1) Calculate the company’s total weekly gross pro t assuming the general-purpose
cleaner is not processed further.
Sales:
ShineBrite ((750,000 ÷ 25) × $15)
$450,000
General-Purpose Cleaner ((250,000 ÷ 20) × $20)
250,000
Total revenues
$700,000
Costs:
NPR
200,000
Additional costs for ShineBrite
300,000
Total costs
500,000
Gross profit
$200,000
________________________________________________________
(A)(2) Calculate the company’s total weekly gross pro t assuming the general-purpose
cleaner is processed further.
Sales:
ShineBrite ((750,000 ÷25) × $15)
$450,000
Premium Cleaner ((250,000 ÷ 20) × $16)
200,000
Premium Stain Remover ((250,000 ÷ 20) × $16)
200,000
Total revenue
$850,000
Costs:
NPR
200,000
Additional costs for ShineBrite
300,000
PST
140,000
Total costs
640,000
Gross profit
$210,000
_________________________________________________________
(A)(3) Compare the resulting net incomes and comment on management’s decision.
Answer: If the general-purpose cleaner is processed further overall company profits will be $10,000 higher. Therefore, management made the wrong decision by choosing to not process general-purpose cleaner further
______________________________________________________________
(b) Using incremental analysis, determine if the general-purpose cleaner should be pro- cessed further.
Don’t Process
G-P Cleaner Further
Process
G-P
Cleaner Further
Net Income Increase (Decrease)
Incremental revenue
$250,000
$400,000
$150,000
Incremental costs
0
(140,000)
(140,000)
Totals
$250,000
$260,000
$10,000
Notes:
When trying to decide if the general-purpose cleaner should be processed further into PC and PSR, only the relevant data need be considered. All of the costs that occurred prior to the creation of the general-purpose cleaner are sunk costs and can be ignored. The decision should be made by comparing the incremental revenue from further processing to the incremental costs
Sales:
ShineBrite ((750,000 ÷ 25) × $15)
$450,000
General-Purpose Cleaner ((250,000 ÷ 20) × $20)
250,000
Total revenues
$700,000
Costs:
NPR
200,000
Additional costs for ShineBrite
300,000
Total costs
500,000
Gross profit
$200,000
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